Recouping missed pension contributions requires clients ask themselves difficult questions

A culmination of factors including furloughs and job losses are weighing on the financial condition of many pensioners, forcing them to rethink their retirement plans.

Long before the COVID-19 pandemic hit, there were varying views on pension and retirement savings. Higher salaried individuals who could afford financial advice to plan for their future had a different outlook compared to minimum wage workers who could not afford to save much. Though the inability of low wage earners to adequately plan for retirement has been known for a long time, governments have done little to help their situation, as they have been busy with their own issues, namely Brexit.

As the world works towards getting back to “normal”, questions of long-term impact arise. 

Pension savings take a hit

Data from the Office for National Statistics showed that the majority of UK employees on company payrolls dropped by 828,000 since February 2020. Furthermore, payments to defined pension plans fell by 11% in Q2 2020.

The head of the UK’s retirement policy, Matthew Arends, has said that one in four respondents to their 2021 DC survey stated that they had been laid off and one in six mentioned that their hours or compensation had been reduced in 2020. Understandably, this has had a significant impact on their ability to contribute toward pension savings.

According to data compiled by Legal and General, people in the 50-59 age group reduced their retirement savings by £165 a month on average in 2020 in response to the pandemic.

Another important observation is the polarization we are seeing in the private sector. There is a vast difference between sectors that are flourishing as a result of the pandemic and sectors such as retail, travel & hospitality, which have seen a huge loss in business demand.

So, what is the takeaway from all this?

The important thing to remember is that no matter how bad the current situation is, it is never too late to plan and improve retirement savings.

Research from L&G shows that a 50 year old choosing to opt out of a pension plan stands to lose out nearly £100,000 by the age of 75 in the event they do not resume saving. However, if they were to restart pension contributions in 3 years, the loss reduces to £12,738 by age 75. This is a crucial point for people of all ages to understand. It is better to restart late if need be, but don’t pull the plug on restarting these contributions completely.

People usually tend to under-estimate their retirement needs while over-estimating expected support from the government. This is dangerous thinking, which could eventually see an entire generation facing poverty by retirement.

A blessing in disguise?

As the pandemic spread and governments worldwide began imposing lock-downs, the majority of the population was forced to stay at home. With much more free time on their hands, people began seriously thinking about their financial choices, which is actually a good thing. The pandemic made people reflect on their decisions and the impact it has on their financial future. In that way, the pandemic has been beneficial, as it forced people to ask tough questions about their spending and saving habits. Hopefully after seeing the example presented above, those that have halted their pension saving plans will reconsider their decisions - if not for themselves, at least for the sake of future generations.