What a fall in income means for your retirement plans

Pension contributions can be one of the first cutbacks people consider making

Elderly spouses sitting on couch at home planning budget check bills cheques, computer, documents and calculator on coffee table, couple manage family expenses concept

Thousands of people have seen their incomes reduce due to the coronavirus pandemic, which may affect their ability to save for the future.

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Pension contributions can be one of the first cutbacks people consider making, as they focus on more immediate financial priorities.

According to latest figures from the Office for National Statistics (ONS) employee contributions to workplace defined-contribution pensions fell 11% between the first three-month period of 2020 and the second. Around £1.76 billion was contributed to these schemes between January and March last year, but this fell to £1.56 billion between April and June.

Most company pension schemes are defined contribution pensions, where the amount you’ll end up with at retirement depends on how much you and your employer have contributed, and the performance of the fund or funds your contributions have been invested in.

Martin Ansell, pension expert at financial advisers NFU Mutual said: “These figures highlight the long-term hidden impact the pandemic will have on retirement plans. Although the furlough scheme has kept many people in employment, reduced salaries lead to reduced pension contributions.  “Many will have missed out on generous tax reliefs during this period, and may have to contribute more to their pension in the future to have their desired retirement.”

If you’re considering reducing your contributions

Some people may feel they have no option but to reduce the amount they pay into their pensions so that they can focus on covering day to day living costs. However, it’s vital to think about whether it might be possible to make cutbacks elsewhere, as lowering your pension contributions can have a significant impact on your future retirement income.


Steven Cameron, pensions director at Aegon said “While there may be an immediate boost to take home pay, Aegon analysis shows an employee in their mid-20s on average earnings could lose out on around £18,400 at state pension age if they decrease their contributions by just 1%, or a 9% fall in retirement income. But the saving in take home pay would only amount to £14 after tax relief. The shortfall could be even greater if they are in a scheme where their employer ‘matches’ their contributions. If their employer also reduces their contributions by 1%, the shortfall would double to £36,800.

“The power of compound investment growth means it’s the pension contributions paid in the early years that have longest to grow and make the biggest difference in ultimate retirement income. But for those closer to retirement, a small reduction in contributions can still have a big impact.”

However, don’t despair if you are forced to pause contributions for a short period. Check how much you might be entitled to from the State Pension, as this can help you work out home much extra you might need to pay into your workplace pension when you’re able to resume your contributions.

Fabian Taylor, chartered financial planner at Nelsons, said: “The State Pension will form the backbone of retirement income for most people. The age at which you can access your State Pension is 66 but this will rise to 67 by 2028.

“For people who reached their State Pension age on or after the 6th April 2016, the maximum State Pension is currently £175.10 per week, although this is increasing to £179.60 per week from April 2021. Assuming a couple is entitled to the maximum State Pension, this would provide more than £18,000 worth of income per year. You can obtain a State Pension forecast on the government’s website if you are unsure what amount you would get.”

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