Pension Breaks
PENSIONS AT RISK FROM DEBT REPAYMENTS, SAYS BREWIN DOLPHIN
- One in ten pension savers to stop, pause or reduce their contributions over next 12 months due to economic outlook
- Average 'pension payment break' is almost two years
Britons are putting their long-term financial future at risk by taking 'pension payment breaks' according to new research commissioned by Brewin Dolphin, the UK's largest independent private client portfolio manager. The study warns that one in ten (over 2.4 million) pension savers expects to 'stop' (5%), 'pause' (2%) or 'reduce' (3%) their pension contributions during the next 12 months as a result of the worsening economic outlook. Those most likely to do so are aged 25-34 (over 800,000) claims Brewin Dolphin. See case study below.
Historically, 20% of pension savers stop, pause or reduce their payments at some point in their working life (see Table 2). It is therefore alarming that so many intend to make changes to their pension contributions within the next 12 months. Brewin Dolphin believes that this is a reaction to the current economic turmoil. The findings also support recent research from the FSA, which found that 20% of mortgage holders were worried about meeting their repayments in the next 12 months.
The average length of time for those who have paused or reduced their pension payment is almost 2 years (22 months), with 13% doing so for more than 5 years, says Brewin Dolphin. The findings show that of the people spoken to; those living in Scotland are likely to pause their contribution for just 11 months compared to those from the South-East and East-Anglia who do so for around 27 months. Women are more likely to pause or reduce their pension payments than men.
Charlotte Black, Director of Corporate Affairs at Brewin Dolphin, commented:
"Given tighter credit conditions, it seems likely that pension payment breaks will become increasingly prevalent as the immediate pressures of servicing mortgages and dealing with credit card debts take their toll. This will result in a further depletion of pension pots that have already suffered by the Governments's decision in 1997 to remove tax credits on dividends in pension funds. Even the shortest payment break could have serious consequences for the income a pensioner has in retirement."
Beverley Lavin, Pension Specialist at Brewin Dolphin, added:
"Cutting pension contributions is always a false economy and will certainly cost you much more to replenish your funds in the future than you will save in the short term. My recommendation is always to focus on pensions for the longer term."
Case Study
A 32-year-old man aiming to retire at 58 and saving £400 a month into his pension fund (which is currently valued at £40,500) could expect a £791,760 pension pot in 2034. However, if he stops paying into his pension for a year, the pot would be worth just £756,201 - a saving of £4,800 today, but leading to an eventual loss of £35,559.
Brewin Dolphin's Pension Calculator, principally designed to show the impact of the removal in 1997 of dividend tax credits on individual pension funds, has been enhanced to show the cost of pension payment breaks. For the Assumptions used by the calculator and in the above case study, please view Assumptions.
Additional Findings
Over the next 12 months, people living in London (12%) are the most likely to stop, reduce or pause their pension contributions, closely followed by the South East and East Anglia (11%).
Table 1: Pension holders who are planning to stop, reduce or pause their contributions in the next 12 months:
| Region |
Inhabitants planning on stopping, reducing or pausing contributions |
Number of adults |
| Greater London |
12% |
(313,000) |
| South East / East Anglia |
11% |
(588,000) |
| Scotland |
11% |
(290,000) |
| Wales & West |
10% |
(342,000) |
| North West |
9% |
(277,000) |
| Midlands |
8% |
(366,000) |
| North East / Yorkshire / Humber |
7% |
(264,000) |
Table 2: Reasons why people have stopped, reduced or paused contributing to their pension scheme:
| Reason |
Proportion of respondents |
Number of adults |
| To meet increased mortgage payments |
12% |
913,000 |
| To pay for school fees, car etc |
12% |
892,000 |
| To pay off unsecured debt |
10% |
771,000 |
| To meet the costs of having a child |
8% |
597,000 |
| To fund a divorce settlement |
8% |
596,000 |
| To pay for a wedding |
3% |
251,000 |
| To save for the deposit on a house |
3% |
213,000 |
| To pay for a holiday |
2% |
128,000 |