Pensions, Savings & The Cost Of Living Crisis

Due to the record rates of inflation this year, many people across the country have stopped paying into or are cashing in their pensions and savings in order to pay their household bills. Whilst this might be a tempting option and unfortunately an essential one for many, it could lead to issues in the future as many will end up worse off, particularly in retirement, and might even run out of money.

Below, we have answered some questions on how the cost of living crisis has impacted people’s savings and retirement.

What impact has the cost of living crisis had on people’s ability to save?

People may be able to cover a few months of price rises with their savings and by cutting costs, but this will undoubtedly mean their usual process of putting money aside will be impacted. It will be those who were unable to save money prior to the crisis that will naturally be more at risk of financial difficulties as prices continue to rise, as they don’t have savings to fall back on.

Cashing in a pension to cope with the cost of living crisis may seem attractive, but why may it not be in a saver’s best interest?

Cashing in a pension during the cost-of-living crisis may not be in the saver’s long-term best interest. If they are cashing in their pensions to pay the bills now, their pension pot will not be there to provide an income later in life when they come to retire.

They would also miss out on the interest accrued on that money over the years leading to retirement. While it will solve the initial problem, it could then create greater issues and financial difficulties in the future when the person has fewer income options.

Is sacrificing pension contributions during the cost of living crisis tenable? What could the impact on an average saver be, should they reinstate their contributions in a years’ time?

The impact of sacrificing pension contributions depends massively on the stage in which a person is at in their working life. For instance, if someone is a long way from retirement, it can have a huge impact. Missing out on just one year’s savings being added into the pension pot could mean they then have to retire a year later. If they are closer to retirement, the impact will be less significant but can still mean that they are unable to retire when they initially wanted to or have less income to spend.

If a saver stops their pension contribution, they will also be stopping their employer’s contribution. For example, in a scheme where the employer matches the employee’s contributions, for every £80 a basic rate taxpaying employee saves by stopping their contribution, which means that they would lose £200 in their pension. Whilst this might solve a problem now, it could create a bigger issue in the future. However, during these difficult times, there may be some who are left with no other choice.