Pension Blog Series: Episode 1 – The impact of COVID-19 on pensions
Welcome to our new Pensions blog series, where our advisers will be looking at a range of key questions and topics around pensions and your retirement. In Episode 1, we look at the impact of COVID-19 on pensions.
The coronavirus pandemic has had an impact on nearly all aspects of people’s lives, and their finances are no different.
As the country locked down, swathes of people were furloughed under the government’s Coronavirus Job Retention Scheme. Unfortunately, sectors such as hospitality and travel all but ground to a halt.
Short-term gain for long term loss?
As lockdown begins to ease, the government support schemes have become less generous or have been wound up completely. This has resulted in further financial hardship for many already struggling to cover costs. Some savers looking to plug the short-term shortfall have looked to their long-term savings to stay above water. However, even a short pause in pension saving can have serious long-term consequences. The situation has been exacerbated by unemployment and a lack of job opportunities. Therefore, some do not have the option of saving for retirement.
Opting out of workplace pensions
It remains possible for newly enrolled members of a workplace pension scheme to opt out. Before the pandemic, the national opt out rate was around 10%. This was far lower than the 30% rate which had been widely expected before automatic enrolment was introduced.
Recent research from Canada Life reveals that one in 10 workers have paused their pension contributions since the start of lockdown and a further 13% are considering doing so. Over a third (37 per cent) have done so to use the money for essential spending. 30 per cent paused contributions due to redundancy or furlough.
Savers paid 11% less into workplace DC schemes last year as the economic effects of the coronavirus pandemic hit. This is according to the latest ONS data.
The figures show that employee contributions fell by 11% between quarter one (January to March) and quarter two (April to June) of 2020. Over this same period employer contributions were down by 5%. The ONS data shows that growth in DC membership also slowed over this period. However, by the end of the June these workplace pensions still had 23m members (the same figure recorded three months earlier).
Hargreaves Lansdown senior analyst, Nathan Long, warns that any break in saving, whether through unemployment of paused contributions, can have “a big impact of someone by the time they get to retirement”. “Broadly, if you have a three-year gap in your saving history over 50 years, it increases the amount you have to pay in by 1 per cent,” he continues. “If you have a gap in your 30s, once your earnings have ramped up a bit, that can be equally harmful.
The analysis shows that even a short pause in pension contributions could have serious financial implications. A 30-year old earning £30,000 a year could lose as much as £45,000 from the potential future value of their pension if they halt contributions for three years.
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Other episodes in this series
- Episode 2 – Reversing damage to long-term retirement plans caused by reducing or stopping pension premiums
- Episode 3 – Gender pensions gap
- Episode 4 – Why are more people turning to their pensions in the crisis?
- Episode 5 – Lump sum losses: the tax hit of large pension withdrawals
The contents of this article are for information only and should not be seen as advice or recommendation to act. Always seek financial advice before taking action in respect of your pension planning.