High net worth individuals need to maintain pension contributions amid the cost of living crisis. Here’s why

Everyone is affected by the cost of living crisis in the UK, one way or another.

Whether the squeeze on your finances has pushed you as far as crisis point, or just made you reassess your discretionary spending, you’ve no doubt been forced to make decisions about your wealth to cope with the increasing costs of goods and services.

However, worrying research has revealed that many people have reduced their pension contributions to give them more cash in their pocket that they can use to manage during this period. In particular, this is a method that high net worth (HNW) individuals have been using in the past six months.

While scaling down the amount you’re setting aside for the future to deal with the present may seem sensible, this could actually be heavily detrimental to your long-term wealth.

So, find out why HNW individuals are cutting back on what they’re putting into their pensions, and the reasons that this may not be a sensible course of action.

1 in 7 high net worth individuals have reduced their pension contributions

Figures from a survey published in MoneyAge make for concerning reading about just how prevalent reducing pension contributions has been over the past few months.

The data shows that one in seven HNW individuals – those with assets of £250,000 or more – have already reduced the amount they’re paying into their pensions. A further 14% also said that they plan to do the same over the course of the next six months.

On average, HNW individuals have reduced their pension contributions by £1,246 a month – almost £15,000 a year.

The reasons for HNW individuals coming to this decision were fairly varied, although 84% cited a hefty increase in mortgage rates putting strain on their available cash.

Meanwhile, the research also points to the fact that HNW individuals don’t know just how much it will cost to live their desired lifestyle in retirement, with some underestimating what they’ll need by as much as £120,000.

As a result of this miscalculation, many of these individuals may think that they already have enough in their funds and so are comfortable cutting back, despite actually being well short of what they will really need.

With factors like these in play, it may be unsurprising that pension contributions are the first place these individuals are looking when trying to reduce their outgoings.

Reducing your pension contributions could harm your long-term financial health

Of all the expenses to cut back, your pension contributions might seem like the right area to do so. It can be easy to lose the long-term mindset and erroneously think that it’s more sensible to have money in your pocket right now, rather than setting it aside for later life.

However, if you’re thinking about reducing your contributions, it’s important to firstly consider how this could affect your long-term financial health.

Research by AJ Bell paints an interesting picture of just how impactful stopping contributions could be.

Using the example of a 30-year-old earning £30,000 a year and contributing a total of 8% to their pension, these figures show that pausing contributions for just three years could cost them £15,000 in their pot by the time they turn 68.

Now apply this to your own situation. You are likely earning considerably more than this, meaning your contributions are probably greater.

Furthermore, you’re likely to be a higher- or additional-rate taxpayer, and so are entitled to 40% or 45% tax relief on a portion of your contributions.

As a result, you may have larger sums of money at stake when reducing how much goes into your pension, which could potentially make it even more damaging to do so.

When you consider that so many HNW individuals underestimate what they will need in retirement as it is, it could give you a compelling reason to keep saving into your fund now.

Speak to an adviser before you cut down on your pension contributions

If you’re looking for ways to manage your money amid the cost of living crisis, it may be sensible to speak to an adviser before you make a decision such as reducing your pension contributions.

A planner can take a holistic look at your finances, whether that’s your pension or other savings and investments, and help you to organise your wealth no matter what your current concerns are.

Crucially, a financial planner will take your personal goals for the future into account. This is important, as it means they can help you to make informed decisions with your money to target your desired lifestyle in retirement.

That way, you can be confident that you can afford your standard of living, both now and in the future.

Get in touch

If you’d like to find out more about how we can help you plan for the future, please email enquiries@rosebridgeltd.com or call 01204 300010.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.