Workers are debating skipping their regular pension payments to help pay for rising energy bills in 2022 – but this could mean they lose £77,000 by the time they reach retirement.
With the energy price cap increasing by £693 from 1 April, the average customer is expected to be forking out an extra £57.75 per month for their energy.
Research by Penfold, a digital pensions platform, has suggested that nearly 13million pension savers save less than £100 into their pension each month, and may need to reduce their contributions in order to cope with the rising cost of living.
Those who cannot afford to save much money in their pension may consider cutting contributions altogether to cope with the cost of living crisis, according to Penfold
Of these, it said more than 6million only saved between £1 and £50 into their pension each month.
As this is eclipsed by the typical rise in energy bills, Penfold has said they may decide to no longer pay anything into their pension at all.
But experts have urged savers not to skip their pension contributions to pay for their bills, as the long-term losses could see their retirement fund down by up to £77,000 in the worst-case scenario.
Young workers would be the most at risk if they stopped their pension payments now, according to Penfold.
A saver currently aged 30, for example, would miss out on nearly £1,750 on the value of their final pension pot at age 67 if they reduced their pension contributions by £57.75 each month for one year to meet rising energy costs.
If energy bills stayed at the same level for five years and these savers continued to reduce their contributions, the potential losses could total £9,000.
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And if, in a worst-case scenario, energy prices stayed at the same level until they reached 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.
A 20-year-old would miss out on even more, with total losses reaching £77,600.
According to Penfold, an individual’s pension contributions should be 12 per cent of the average salary (currently £31,285) for a ‘modest’ retirement.
This would mean monthly contributions close to £313 per month.
For the 40 per cent of adults currently putting in less than £100 a month, cutting their contributions further could be seriously damaging to their quality of life in retirement.
Chris Eastwood, co-founder at Penfold, said: ‘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.
‘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.’
The cost of energy per kWh has rocketed due to a surge in wholesale gas prices
More relying on credit to afford rising bills
The UK’s energy crisis has prompted one in five people to rely on credit cards, loans and overdrafts to manage the mounting costs since the start of the year, according to separate data.
CreditKarma has predicted that nearly £5 billion has been loaned out since the start of 2022 to cover rising energy bills and cost of living expenses.
Unable to avoid the rising costs, more than a quarter (26 per cent) fear they can no longer afford their bills, the credit broker said.
The vast majority (78 per cent) of those who have borrowed money to counter the rising cost of bills fear also they won’t be able to meet the debt repayments.
Those who are worried about rising energy bills, you should speak to their provider to see if they are eligible for any discounts or support.
Switching providers to save money does not make sense for most customers at the moment, as capped ‘default’ tariffs are cheaper than fixed deals.
However, customers could consider getting a smart meter as this may save them some money.
For those who are thinking of cutting their pension contributions, Eastwood advises that they do not stop paying in completely.
‘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.
‘We 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.’
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