What is the impact of the cost of living crisis on people’s ability to save for retirement?

hand putting a coin into a jar labeled retirement, next to an alarm clock

Since the pandemic, people have been faced with a multitude of challenges impacting their finances and none more so than the cost of living crisis. Recently, the pressures on household income has raised concerns that members will look at their pension contributions as a way of cutting back on their monthly costs.

The Department for Work and Pensions[1] reported in October that there had been no significant rise in people who are currently saving into workplace pension schemes choosing to stop contributions.

However, new research from the Pensions Management Institute[2] (PMI) has suggested that this may now be changing. It revealed that of those saving into a pension scheme over the past twelve months:

  • 13% have reduced their contributions and a further 20% are considering doing so over the coming months.
  • 7% have already ceased their contributions.
  • 17% of those old enough to do so have withdrawn money from their pension savings to meet short-term needs

Jonathan Watts-Lay, Director, WEALTH at work – a leading financial wellbeing and retirement specialist and also PMI’s Financial Education partner, comments;

“It’s alarming that these latest figures now suggest that the cost-of-living crisis is having a detrimental impact on pension savings, with so many already taking action and reducing or stopping their contributions, and with some even dipping in to them to supplement short-term needs. With many more considering reducing their contributions over the coming months, it is set to get worse before it gets better.”

He adds; “It’s vitally important for members to understand that opting out of their pension will have a huge impact in the long term and will cause damage to their standard of living in retirement. They need to understand that reducing contributions now would make relatively small savings each month but the impact on their retirement savings to be used in later life will be dramatic due to lost employer contributions and tax relief.”

Watts-Lay explains; “Not only this, the damage caused by dipping into your pension savings early to supplement your income in the short-term can be irreparable, so this really should be a last resort and considered carefully.”

The new findings also reveal that people are concerned themselves about their retirement prospects;

  • 75% of working people are ‘concerned’ that the cost of living crisis will mean that they will experience a less comfortable retirement.
  • 70% believe that they would have to defer retirement, and typically expect they will need to work for an extra three years due to the crisis.
  • 28% believe that they would never be able to retire at all.

Jonathan Watts-Lay, Director, WEALTH at work, comments;

“For those approaching retirement, it couldn’t be more important to make sure they have a plan in place. Many will be concerned if they can afford to retire now, especially if their pension value has fallen due to market volatility. As the research shows, many are considering delaying retirement. Another option could be to work part-time instead.”

He explains; “Members may also want to consider making further pension contributions to boost their pot and take advantage of the tax relief while they can. However, they should be aware that if they have already made withdrawals from their pension, other than the tax-free lump sum, the ‘Money Purchase Annual Allowance’ kicks in, which limits the amount that can be paid into a defined contribution pension to £4,000 a year.”

Watts-Lay comments; “It would be devastating for all the hard work that is put into helping pension savers build up their funds, to be undone due to a knee-jerk reaction to the current financial pressures. This is why members must be supported to protect their pensions, especially in times of crisis. As part of an overall financial wellbeing objective, many employers now offer their workforce support to help them understand the value of their pensions and workplace savings, as well as how to best manage their money during turbulent times. This includes providing financial education workshops, one-to-one guidance or coaching and digital tools and helplines, as well as regulated financial advice.”

[1] DWP

[2] Research was commissioned by the PMI and completed in November 2022. Research based on Censuswide survey of 2,000 working people.

The latest news is brought to you by WEALTH at work, a leading financial wellbeing and retirement specialist. WEALTH at work and my wealth are trading names of Wealth at Work Limited which is a member of the Wealth at Work group of companies.

Links to websites external to those of Wealth at Work Limited (also referred to here as 'we', 'us', 'our' 'ours') will usually contain some content that is not written by us and over which we have no authority and which we do not endorse. Any hyperlinks or references to third party websites are provided for your convenience only. Therefore please be aware that we do not accept responsibility for the content of any third party site(s) except content that is specifically attributed to us or our employees and where we are the authors of such content. Further, we accept no responsibility for any malicious codes (or their consequences) of external sites. Nor do we endorse any organisation or publication to which we link and make no representations about them.