Pensions ‘holiday’ to save cash could be false economy

One in five Scots with a pension has stopped paying into it as financial pressures force them to tighten their belts, a report out today reveals.

And almost one in ten workers who are no longer making pension contributions say they don’t plan to resume them, according to research by Prudential. It warned that workers missing even a year’s payments will see their final pension fund slashed and miss out on valuable tax relief.

More than a fifth of Scots who have stopped making contributions did so because they were out of work, compared with a third across the UK as a whole. But more than half of Scots no longer paying into their pension said they couldn’t afford to keep making contributions – compared with a UK average of just 27 per cent.

A saver making the average pension contributions of £2,400 a year could cut their final pension fund by around £7,000 if they skip even a year of payments, based on average investment growth of 7 per cent a year.

Vince Smith-Hughes, head of business development at Prudential, said: “Tightening your belt when times are hard is sometimes necessary, and putting pension contributions on hold might seem an easy way to save money; however, neglecting pensions today means throwing money away tomorrow, as savers will miss out on perks, such as tax relief and employer contributions.

“Abandoning your pension pot really should be a last resort when times are tough.”

The biggest pension contribution cuts are being made by women, according to new research by Friends Life. Its Workplace Savings Index found that female workers aged under 30 have trimmed payments into workplace pensions by an average of £2 to £128 a month in the last year, while there has been an average £1 drop to £213 a month for those aged 30 to 45. Women aged 60 or over have also seen contributions fall, by £2 to an average of £193 a month.

The overall picture differs significantly between genders, with men increasing pension contributions by an average of £14 to £324 a month over the past year. The typical pension contribution for women is now £200, 38 per cent below the £324 monthly average for men.

Martin Palmer, head of corporate benefits marketing at Friends Life, said: “It looks like good news that on the whole individuals have weathered the economic storm to date and have maintained pension contributions, but when you look at the impact on contributions by age and gender a more concerning picture emerges, where the average contributions made by women have decreased in value.

“This is particularly concerning given that average contributions are already too low.”

The reports come as the Association of British Insurers (ABI) moves to increase the number of savers who shop around for an annuity at retirement, rather than taking the pension income offered by their existing provider. The trade body has proposed to ban insurers from including annuity applications in the packs it sends pension customers approaching retirement, in a bid to encourage more people to shop around for the best deal.

However, Tom McPhail, head of pensions research at Hargreaves Lansdown, dismissed the ABI’s proposals as a “fudge”.

“Consumers only get the chance to buy an annuity once, after which they are locked in; the pensions industry should be taking all possible steps to ensure they are getting the best deal,” he said.