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Cost-of-living is putting regular saving on hold

Jonathan Watts Lay, Director - WEALTH at work

Half (50%) of 18–34 year olds say the increase in the cost of living has meant that they have reduced or stopped any regular savings. This is compared to over two fifths (42%) of all UK adults, and more than a third (32%) of those aged 55 and over, according to a survey of 2,000 UK adults, conducted by WEALTH at work, a leading financial wellbeing and retirement specialist.

Young people have been hit hard by the cost of living crisis, as they spend, on average, double on essentials like rent or bills than people aged over 51[1]. However, the benefits of saving whilst young are significant. If they can, young people should look at other options before stopping or reducing savings, as it could cause problems for their finances in the future and may be something they regret later in life.

The research also uncovered some concerns about pensions and future retirement savings. Nearly a third (32%) of working 18-34 year olds know they should be saving more for their retirement and only 16% believe their savings are on track for a comfortable retirement. More than a fifth (21%) have no idea how much their pension is worth and almost a quarter (24%) have no idea how much they will need to have for a comfortable retirement.

Auto-enrolment means many people are already paying 5% of their salary into their workplace pension, with their employer contributing an additional 3%. However, only a quarter (25%) of young people know they can save more into their pension than their default contribution rate, and they may not realise that many employers are willing to match additional contributions up to certain limits.

For example, someone in their 20s, saving an extra 1% a year with their employer matching this, may be able to increase their pension pot in retirement by 25%.

The examples below are for basic rate tax payers earning £20,000 and £40,000, and to demonstrate how it would work for a higher rate tax payer there is also an example of someone earning £55,000. They all plan to retire aged 68, are paying 5% of their salary into a pension via a salary sacrifice arrangement, and their employer is paying 3%.

Example 1: Basic rate tax payer, aged 25, earning £20,000 per year

If both the individual and their employer increased their contributions by 1% (£200) each, an extra £400 per year would be going into the pension. However, the outlay is only £133.50 due to the pension contribution being taken before tax and National Insurance are deducted.

The total pension contribution is now 10%. The pension pot value is estimated to increase from £99,341[2] at retirement to £124,177 – an increase of £24,836.  This is a 25% increase of the original pot.

Example 2: Basic rate tax payer, aged 25, earning £40,000 per year

If both the individual and their employer pay an extra 1% (£400) each, an extra £800 per year would be going into the pension. However, the outlay is only £267 due to the pension contribution being taken before tax and National Insurance are deducted.

The total pension contribution is now 10%. The pension pot value is estimated to increase from £198,683[3] at retirement to £248,353 – an increase of £49,670. Again this is an increase of 25% on the original pot.

Example 3: Higher rate tax payer, aged 25, earning £55,000 per year

If both the individual and the employer pay an extra 1% (£550) each, an extra £1,100 per year would be going into the pension. However, the outlay is only £312.13 due to the pension contribution being taken before tax and National Insurance are deducted.

The total pension contribution is now 10%. The pension pot value is estimated to increase from £273,189[4] at retirement to £341,486 – an increase of £68,297. Again this is an increase of 25% on the original pot.

Jonathan Watts-Lay, Director, WEALTH at work, comments; “It’s very concerning that young people are having to reduce or completely stop their saving in an attempt to free up money to pay for ever increasing bills. Whilst it is completely understandable, it is also important to recognise that stopping saving now could have a dramatic impact on their future, and something they regret later in life. It is important to still save what they can.”

He comments; “Saving may not be something many employees are thinking about in their 20s, it is really important that they understand the difference that saving more early on can make, compared to starting in their 30s or 40s, especially if their employer will match extra pension contributions.”

He continues, “Before cutting back on any savings, employees should check all their outgoings to find other ways to save money e.g. cancelling any unused subscriptions or memberships, shopping around for better deals on TV, broadband and mobile suppliers, and switching brands on their regular shop. Also, discount vouchers are often available online, and employees may have access to discount vouchers through their employer.”

He continues, “It also may be better for an employee to reduce how much they save to what they can still afford rather than stopping it completely. Saving money is a habit, and once it is stopped, it is very difficult to start up again.”

Watts-Lay adds; “Many workplaces are now offering financial education and guidance to help employees look after their money in a crisis.”

The survey of 2,000 UK Adults was carried out by Opinium from 8 – 11 April 2022.

[1] Youth Futures Foundation – www.youthfuturesfoundation.org/news/cost-of-living-crisis-hits-young-people/

[2] Assumptions: The employee is a member of a DC workplace pension scheme, the percentage contributions shown are paid with immediate effect and do not change in the future, pension contributions are paid by salary sacrifice by an employee based in England or Wales and are within HMRC limits, any pension savings already held by the employee are ignored, the member is exactly 25 years of age (their birthday is today), annual salary increases by 2.5% each year, pension charges of 0.75% apply, investment growth is 5% each year, the pension value is adjusted for inflation at 2.5% each year.

[3] Assumptions: as before.

[4] Assumptions: as before.

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