Is the rising cost of living impacting pension saving?

Dani Skerrett

by , Senior Content Marketing Manager

at PensionBee

02 June 2023 /  

Woman sitting at a table counting savings

It’s been over 18 months since the UK was plunged into a cost of living crisis. Since then, that term’s become part of our everyday vocabulary and is something many of us continue to worry about. Despite inflation falling to 8.7% in May 2023, many are still experiencing the impact of the high cost of living and the fall in real income. With so many of us struggling with energy and grocery bills, it can be difficult to think about stashing money away for retirement. According to a report from the Financial Services Compensation Scheme (FSCS) from March 2023, 85% of people were increasingly worried about their future and the impact of the cost of living crisis.

The impact of the cost of living crisis on pensions

So what’s the real impact of the cost of living crisis on pension saving? According to the FSCS, 23% of those with a pension have either decreased their contributions or stopped them altogether. While this could provide temporary relief and enable you to cover a rise in bills or build a more accessible emergency savings fund, there’s no getting away from the fact that it’ll significantly impact your retirement fund and the compound returns on your pension. If you’re worried about how far your savings will go in retirement due to the steep rate of inflation right now, our inflation calculator could help you visualise how your pension could be impacted.

The FSCS also found that 28% of people have consolidated different pension pots into one since the cost of living crisis, while 13% say they’ve changed their pension provider, which suggests consumers are also proactively trying to protect their pension savings where they can.

Under-35s are significantly more likely to be relying on their savings as a result of the cost of living crisis. And whilst for those under 35, retirement can seem a way off, there are huge benefits to starting early when it comes to saving for your future and so eating into the money that you could be putting into your pension savings now, might set you back later down the line.

For those approaching retirement, the report found 29% of respondents aged 55 and over have moved money out of their pensions to cover day-to-day costs. While in some circumstances this might be the only option, there are some things you can do to protect your future savings.

Four ways you can protect your pension during the cost of living crisis

Founder of Money to the Masses; Damien Fahy says: “Whatever you’re putting away, whether it’s into a pension or other savings, you can dial down and dial back up, like a dimmer switch. You can turn it down when you need to, but then turn it back up at a later point. If you turn it off, it becomes much more difficult to turn it back on.”

  1. If you’re tempted to stop contributing to your personal or private pension for now, consider reducing the percentage you’re contributing rather than stopping altogether. Even if retirement seems a long way off, the small amounts that you pay in each month will go a long way in the long term, thanks to compound interest and investment growth. So if you can, continue your contributions even if they’re small amounts. If you’d like to see the impact of stopping or dialling back your pension contributions, why not use our pension calculator?

  2. When it comes to workplace pensions, it’s worth noting that if you do reduce your contributions, or indeed opt out altogether, your employer contribution, and tax relief, is likely to also be impacted. If you do need to opt out of your workplace scheme, make sure you check the policy thoroughly as by opting out, you may also lose valuable benefits paid in case of illness or death.

Consumer Editor at The Financial Times; Claer Barrett says: “With workplace pensions, say you put in 5% of your salary, it seems like a wrench at the time but your employer might match it by contributing another 10%.”

  1. It’s vital that you check what you’re entitled to in terms of Universal Credit. There’s a massive £19 billion unclaimed every year in the UK. It might be that you’re entitled to additional support for energy bills or housing costs, and you mightn’t need to impact your savings and pension contributions.

  2. If you aren’t sure what you have in terms of pension savings, now’s a good time to think back to previous jobs where you may have had a workplace pension and start tracking them down. If you’re under 55, you won’t be able to take the money out, but you could reduce any fees you’re paying on several different pots by consolidating them into one.

If you feel as though you need some guidance, there are a number of organisations that you can turn to for support when it comes to financial struggles such as Citizens Advice, StepChange and MoneyHelper. If you feel as though you need specific financial advice, and are able to pay for it, make sure that it’s regulated - you can check this on the Financial Conduct Authority’s free register of authorised individuals, firms and bodies. The Money Advice Service has a similar directory for those seeking independent pensions advice and, if you’re over 50, you’re eligible for a free appointment with a government service called Pension Wise, which can give individual and specific guidance about accessing your pension pots.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. Anything discussed on the podcast should not be regarded as financial advice.

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