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Triple threat to pension contribution cutters

Triple threat to pension contribution cutters

Category: Pensions

Updated: 06/02/2012
First Published: 13/06/2011

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Pension savers who are cutting contributions to their pension funds face a three pronged threat to their retirement plans, it has been warned.
The warning comes after LV= recently found that one fifth of people nearing retirement had cut their pension contributions.

The average cut was £342 a month, higher than had been reported in the preceding two years.

Proclaiming the figures made worrying reading, Anna Sofat, director of Addidi, said pension saving may seem easy to cut because there is no immediate effect, but warned the long-term consequences could be severe.

"First, because pension savings compound over time, a little extra in the hand now means foregoing a much larger sum later," she explained.

"Even at modest growth rates, a £100 a month of pension saving plus tax relief could grow to £20,000 within a pension in just 10 years' time and more than £33,000 five years after that.

"Second, investments made during tough times can often perform better than those made in the good times. Yes, times have been tough but many canny investors have done well by buying assets when prices were depressed. Arguably people should try to increase pension savings at these times.

"Finally, I think that once people get out of the habit of pension saving, it is harder for them to start up again even when the money becomes available. What starts as an emergency decision can easily become the norm."

Revealing her belief that it is never too late for people to start or resume pension saving, Ms Sofat pointed out there is a massive shortfall between what many people are saving and what they need to save.

As an example, she points out that around one-third of women in their 50s are not saving into a pension at all.

"It is assumed many keep on working," she added. "But even if working later is what people want to do and they are in good enough health to do it, it is still debatable if the right jobs will be there.

"Those who can save a bit more now are giving themselves many more options later."

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