Pension crisis as six million workers cut back on savings

Almost six million workers have given up on saving into their pensions as falling real wages begin to bite.

A large-scale pension crisis is brewing with one in ten adults reducing or halting contributions altogether to deal with the rising cost of living, Scottish Widows, the pension provider, has warned. In total, £2.5bn of pension contributions will be lost this year, the group estimated.

Up to 5.8 million people have stopped saving in favour of receiving the extra money today, Scottish Widows' analysis suggested.

As a result, millions of British workers will retire with too little in their nest eggs to provide a comfortable retirement, the provider's Pete Glancy said.

Hard-pressed households have come under more pressure this year from a triple whammy of inflation, tax hikes and high energy and fuel prices. Three quarters of British households will need to take action to cope with the growing financial pressures with inflation expected to hit 11pc later this year. Many have looked to their pension contributions as a source of additional cash.

But pausing payments into a “defined contribution” pension, the most common type used by today's workers, could significantly reduce the size of a savings pot at retirement.

Missing even one year of contributions now could cost tens of thousands of pounds and severely impact a pensioner’s quality of life. For an average earner in their 30s two years of missing contributions would create a £15,000 hole in their pension by the time they reach retirement, compounded by lost investment returns, Scottish Widows calculated.

Anyone who cuts their contributions to a workplace pension will forgo their employer’s contribution and tax relief from the Government. Workers risk skipping up to three years of payments, as anyone opting out of a workplace pension will not be automatically re-enrolled for 36 months.

Mr Glancy said: “The most damage is done by those in their 20s and 30s. Every £1 invested in the early years of a career is worth £4 compared to if it is invested later on.

"It’s understandable that households are being forced to make some tough choices in their budgets, but it’s important they do so while taking a longer-term look at their finances.”

Britain could be sleepwalking into a bigger, long-term savings crisis, he warned.