One in 10 workers pause pension contributions amid COVID-19

One in 10 workers have paused their pension contributions since the start of lockdown, with a further 13% considering pausing contributions, according to research by Canada Life.

The analysis revealed that amongst those who have paused contributions, over a third (37%) had done so in order to use the money for essential spending, while a further 30% paused contributions as a result of redundancy or furlough.

Canada Life emphasised that pausing contributions for three years, the period of time before workers would be re-enrolled through auto-enrolment, could “wipe thousands off a pension pot” unless contributions are increased “significantly” following a pension holiday.

Its analysis revealed that a 30 year old earning £30,000 could lose as much as £45,539 from the value of their pension by opting out of a pension for three years, representing a drop in value of their pension at age 67 of 9.3%.

Furthermore, in order to make up this shortfall, they would need to increase total pension payments from 8% to 8.8%, equivalent to an additional contribution of nearly £13,000.

Canada Life warned that the findings become “starker” as an individual gets closer to retirement.

For example, a 50 year old earning £100,000 with an existing pension valued at £100,000 could lose out on £71,513 as a result of a three-year pension holiday, equivalent to a 11.2% fall in the value of their pension at retirement.

This in turn would require contributions of 12.2% in order to make up the shortfall, equivalent to an additional contribution of £17,886.

Commenting on the findings, Canada Life technical director, Andrew Tully, stated: “With COVID-19 hitting personal finances harder than ever it is not too surprising that many have started to view their pension contributions as discretionary.

“While a three-year pension holiday may seem like a minor break in the context of a career spanning decades, our analysis shows that the long-term impact of that decision could be significant.

“Any choices made now could have real significance to the quality of life in retirement so it is vital that the impact of this is understood properly, from the outset.

“It is worrying to see that 13% of respondents were actively considering a pension holiday. However, there are some ways to mitigate the potential impact."

He added: “Our analysis shows that losses can be recovered at each stage of a working life as long as there is a plan in place to resume contributions as soon as practicable.

“Savers will also need to understand that contributions will need to be higher than they were before and in some cases by as much as a fifth for those closer to retirement."

(This article first appeared on our sister title www.pensionsage.com)

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