Savers could miss out on up to £77,000 on the value of their pension pot if energy price rises are sustained
Rising energy bills and the increased cost of living pose a serious risk to the pension savings of 13 million Britons, according to Penfold, the digital pensions platform.
With Ofgem increasing the energy price cap from 1st April 2022, the average household’s yearly energy bill is expected to increase by £693, forcing customers to pay an extra £57.75 per month. However, with recent research from Penfold revealing that 19% of working adults say they only save £1-50 in their pension a month, 6.2 million adults* are at risk of not saving anything into their pension as they divert the money used for pension contributions to help manage rising short-term costs. The research also shows a further 21% of people say they only save between £51-100 a month, meaning an extra 6.8 million working Britons may also need to pause or reduce their pension contributions to cover the increased cost of energy bills, making pensions another casualty of soaring living costs.
Figures from Penfold show what the long-term impact of pausing contributions can have on a saver’s pension pot at retirement. Taking into account the compounding effect of investment returns, a saver currently aged 30 will miss out on nearly £1,750 on the value of their final pension pot at age 67 if they reduce their pension contributions by £57.75 for a year to meet rising energy costs. If energy bills stay at the same level for five years and these savers continue to reduce their contributions, these potential losses could reach over £9,000.
And if, in a worst-case scenario, the rise in energy prices is sustained until retirement age, these savers could miss out on nearly £53,000 from their total pot at retirement by reducing their pension contributions to meet increased costs.
These statistics are particularly concerning and show the hidden cost of living from rising energy prices as people could be missing out on significant sums in retirement, putting the UK’s workers at risk of not being able to afford a comfortable lifestyle after they finish working.
Indeed, estimates state that an individual’s pension contributions should be 12% of their monthly salary for a modest retirement and with an average salary of £31,285 for full-time employees in the UK, monthly contributions should be close to £313 per month. However, Penfold’s survey shows that the majority of the country’s workforce are already falling short of key saving milestones and these rising bills serve as another blow.
Chris Eastwood, Co-founder at Penfold, says:
“The UK is facing a serious cost of living crisis and with this rise in energy bills people will struggle to afford their usual standard of living. However, the increase in the energy price cap has a hidden impact on their pension savings which needs to be considered. Our figures show that savers are at risk of missing out on huge sums of money at retirement if they stop or reduce their pension contributions to help pay for the immediate costs coming down the road.
“On top of this, we already know that people aren’t saving enough for later life and these extra costs mean retirement savings are likely to become less of a priority for many – whilst this is totally understandable, it could prove dangerous for later life.
“At Penfold, we want to support savers through this by providing greater flexibility on how much and how often they save into their pension, particularly when finances are tighter than usual.
“Crucial to this will be offering people tools which can project their savings to retirement and help them to break that figure down into how much they need to be saving each month now to afford the lifestyle they want when they retire. It’s also key that providers offer easy access to customer-facing pension experts who can help them make the right choices when it comes to managing their pension during a tougher economic climate.”