Canada Life is warning against pausing pensions contributions as a result of the Covid-19 crisis, as its research reveals that one in 10 workers has done so, with a further 13% considering it.
Of those who paused contributions, nearly two fifths (37%) did so to use the money for essential spending, while a further 30% cited redundancy or furlough.
Canada Life warned that pausing contributions for three years – the time taken before people are automatically re-enrolled into their workplace pension- “could wipe thousands off a pension pot” unless individuals significantly ramp up contributions upon rejoining.
Analysis by the group found that a thirty year old earning £30,000 could lose over £45,000 from the value of their pension by opting out for three years. This becomes more exacerbated as people get older. According to Canada Life, a 50 year old earning £100,000 a year with an existing pension valued at £100,000 could see their pension pot fall by over £70,000, or 11%, by taking a three year contribution break.
Andrew Tully, technical director, Canada Life, says: “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.”
Tully added: “There are some ways to mitigate the potential impact. 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.”
