In light of Pension Awareness Day 2023 (September 15), Prime Wealth is urging everyone to think long-term and protect their pensions during the cost-of-living crisis. If you have paused your pension contributions, or are considering doing so, there are implications to be aware of.
How is the cost-of-living crisis impacting pensions?
Research shows that the cost-of-living crisis has forced people to make snap decisions about where they can save money, including looking at their pensions. However, our managing director, Glen Callow, at Prime Wealth, said that while 2023 has been an incredibly difficult financial year, due to bills rising and real wages falling, he has warned that pensions should be the last thing to go in a cost-of-living crisis.
Should I pause my pension contributions?
Ahead of Pension Awareness Day 2023, Hargreaves Lansdown¹ has released new research revealing that more than a fifth of UK adults have reduced or stopped their pension contributions due to the cost-of-living crisis. Its survey found 14 per cent have stopped pension contributions, while eight per cent have cut back, as they cannot currently afford to save for their retirement. Men and young people are the groups that are most likely to stop or reduce their contributions; almost a third of 18 to 34-year-olds have, compared with just one in five 35 to 54-year-olds.
The figures have increased dramatically in the last 12 months, as only five per cent² of UK adults had stopped contributing to their company pension in 2022 due to the cost-of-living pressures, with a further six per cent actively thinking about pausing their pension contributions.
Glen said: The implications of pausing pension contributions should always be considered when it comes to cutting costs.
Pensions are a goldmine for securing a safe and secure financial future, not only because of the money you invest but the free money and tax-free relief you receive through it.
Glen said while lowering contributions may seem like a quick win to get some extra cash, there are three main reasons this may not be the right decision:
Free money
He said: Pension contributions are simply money you earn today, put aside for the future in the shape of a tax-free pension fund. If you work within a company, individuals will pay on average five per cent of their salaries with employers contributing three per cent; equally free money.
All this money is entered into a capital gains and income tax-free environment. When you reach the age of 55 or 57, depending on when you were born, you can withdraw 25 per cent tax-free, with the remainder subject to income tax as this becomes your salary'.
Tax relief
The effect of tax relief is often misunderstood. A base rate taxpayer effectively receives a 25 per cent uplift versus non-pension saving and for a higher rate taxpayer, this is 66 per cent. Any personal investment paid after income tax would have to work very hard to catch up.
Lost investment and effects of government help
Pausing pension contributions will have huge effects on compound interest, which is the result of receiving growth on your previous year's growth.
By stopping pension contributions for a sustained period of time, your pension savings would not only miss out on the contributions you make during the period, but would also miss the benefit of any growth achieved over the future years and the subsequent compounding of that growth.
Albert Einstein once said, Compound interest is the eighth wonder of the world. He who understands it, earns ithe who doesn'tpays it'.
What is a pension shortfall?
Regular contributions increase the size of a pension pot, which attracts interest. This interest is reinvested and will go on to attract more interest, making more money for the individual.
Without regular contributions, a person is likely to experience a pension shortfall.
With life expectancies growing, Glen said that along with years lived with ill health, pensions and a financially secure future have never been more important. Pausing pension payments could cause irreparable results for retirement, which can span for nearly three decades of a person's life.
He said it is vital for individuals to think long-term when it comes to trying to implement savings as costs across the board continue to soar.
He added: Consider how much harder your savings would have to work should they be depleted by tax both initially and throughout the life of your pension!
Contact our team for pension advice or read the latest research on the gender pension gap.
¹ More than one in five Britons have cut pension payments in living cost crisis, The Guardian, 4 September 2023
² One in 20 pausing pension contributions amid cost-of-living crisis, Pensions Age, 3 August 2022
Prime Accountants Group has announced Morgan Davies as our new managing director, succeeding the long-serving Kevin Johns.
Morgan formally takes over the role on September 1 as part of our advanced succession planning, which has been taking place behind the scenes for some time.
Kevin Johns
Kevin has worked for Prime for 31 years and has been its managing director since 2015.
As well as holding the positions of Solihull BID chairman and vice-president of the Solihull Chamber of Commerce, Kevin has spearheaded Prime’s fundraising efforts, which have seen the business raise tens of thousands of pounds for charities such as Solihull Life Opportunities (SoLO) and Birmingham Children’s Hospital.
Morgan Davies
Morgan is one of the four original founding partners of Prime from 2007 and steps up from his role as director overseeing our audit and accounts department.
While Kevin is stepping down as managing director, he will continue to work with his portfolio of clients and remains on the senior leadership team.
To facilitate Morgan taking on his new role, fellow directors Jeremy Kitson and Paul Guise will take over his responsibility for audit and accounts.
Succession Planning
Kevin, who was awarded a British Empire Medal (BEM) in the New Year’s Honours list in 2019 for services to Solihull, said: “I’ve planned to gradually retire over the next few years, so handing over to Morgan now means we will have a far more controlled and better transition.
“I’ll still be part of the leadership team, I’m still looking after my clients but I just won’t be leading on the day-to-day anymore.
“I said when we marked my 30th anniversary with Prime that I’ve been leaving for a long time! This is long-term succession planning and a natural progression in any business. I’m passing the baton to someone in Morgan who is exceptionally capable and well-positioned to keep the firm on exactly the right path.”
The promotion comes in a milestone year for Morgan, who has worked for the firm for 20 years and has been in practice for 30 years.
He said: “This is part of a succession plan we have worked hard on. I’ve been audit and accounts lead ever since I’ve been here at Prime, which is effectively half the firm, as well as being part of the senior leadership team.
“The experience that gives you is seeing every element of the business up close. It’s a natural fit, we work closely together and I have supported Kev for years.
“The culture of this company is to develop people and empower them to succeed and grow, and this demonstrates that with aplomb. As I move up to managing director, two very capable directors in Paul and Jeremy move up to audit and accounts – it’s good for everyone within the pyramid at Prime.”
About the Author: Glen Callow
