Increasing numbers of employees are opting out of their workplace pensions as the cost-of-living crisis bites but experts warn this could leave future retirees out of pocket.
Inflation has already hit a 40-year high of 10.1% and the Bank of England predicts it could go as high as 13%, with some forecasters even warning the figure may hit 18% or higher.
That means increased bills for everything from energy to food, travel, clothes and holidays.
The Bank of England has already begun increasing the cost of borrowing – the base rate – in an attempt to bring inflation down.
That will mean higher interest on loans and mortgages which could also add to financial pressure on households.
Typical annual gas and electricity bills were going to rise from £1,971 to £3,549 in October, however the Government have introduced a new Energy Price Guarantee limiting this to £2,500 per annum for an average household for the next 2 years.
It is no surprise that households are looking to cut back on their expenses in a bid to preserve at least some of their cash.
Many are looking at their pension contributions and wondering if the money can be used immediately rather than for their retirement to help get over rising cost pressures.
Analysis by online pension provider Penfold has found that the number of savers opting out of company pension schemes increased 29% from March to July this year, just as the cost-of-living crunch began to make its effects felt.
While this may save you money and release some spare cash in the short term, the impact could be felt much longer-term and mean a poorer retirement.
Pete Hykin, co-founder at Penfold, comments: “Everyone understands that the pressures facing today’s savers are considerable”.
“Many people are feeling the pinch on their incomes and savings, but it’s vital that those people who are financially able to pay into their pension continue to do so”.
“The increasing number of opt-outs is a worrying trend, especially as the impact of pausing contributions, even for just a short period, can have a hugely detrimental impact on an individual’s finances in retirement, especially for those starting out in their career.”
A 20-year-old stopping a contribution of £200 per month would miss out on £28,000 in their pension pot from stock market performance if this was carried on for a three-year period.
That means less money for your golden years at a time when you may not be working and may not have other sources of income beyond a state pension.
You would end up having to invest more once you restarted contributions if you wanted to catch up.
Although it is especially tough at the moment, it’s essential to maintain contributions and make cost savings elsewhere if possible. Ultimately cutting off your long-term wealth growth to beat a short-term problem is going to harm your finances either way.