UK workers opt for ‘pension holidays’ as financial crisis hits

Research from Prudential recently revealed 18 per cent of UK workers have reduced pension contributions as a result of the credit crunch, while an AXA survey suggested 1.5 million people plan to take a pension break in the next two years, resulting in a potential decrease in the value of their savings of £35bn.

However, the Government's decision to cut VAT by 2.5 per cent, and freeze the lifetime allowance for pension tax relief has led to suggestions the economic crisis is taking focus away from the lack of retirement saving.

Adrian Boulding, wealth policy director at Legal & General, says: "Over the last 10 years, collectively as a nation we have got the balance of spending and saving wrong. That's why, now that credit is tight, the economy is in trouble as people just didn't put aside enough rainy day savings."

He says the Government "clearly intends the PBR measures to encourage even more spending", but claims that people are "beginning to realise the importance of saving, and the self reliance that it brings and I think they will tuck away at least some of the money we've all been given in Darling's temporary tax cuts".

Ros Altmann, independent pension policy expert, agreed that the country's savings ratio "has plummeted", but suggested a number of ways to halt the process including raising interest rates, reducing reliance on means-testing and removing some of the "regulatory encouragement for borrowing and discouragement for savings."

She claims: "The FSA has operated in an irresponsibly asymmetrical manner. It has allowed banks to lend hundreds of thousands of pounds to individuals who will never afford to repay it, based on self-certification of income, no real checks, and no risk warnings. But putting £20 a month into a pension would involve an adviser in a full fact-find, risk warnings and lots of complexity." 

The challenge of short-term views

Fund	1 month return %	5 year return %	Fund
SKANDIA LEGG MASON JAPAN EQUITY SP	+37.6	+150.6	CLER MED MANAGED LATIN AM EQUITY PN
PRU INDIVIDUAL GUARANTEED PN	-40.6	-48.8	AIG LEGG MASON US EQUITY PN
Performance average all pension funds  over period	-3.1	16.6	Performance average all pension funds over period

Source: Trustnet, calculations on bid to bid price basis

...but reasons to keep saving




The decision to reduce or stop contributions combined with falling stock markets may encourage more workers to opt for part-time retirement in an attempt to recoup their losses. "People with desperately inadequate savings just can't afford to retire. But if you have at least some savings set aside, then part-time retirement becomes an option, with people in their sixties and early seventies choosing what jobs they would like to do and when, and using part-time work to supplement their pension," says Boulding.

But John Jory, deputy director general at B&CE benefit schemes, warns while this will be an option for some people: "Unfortunately the average retirement age for manual workers in the construction industry is around 63 because their bodies are physically incapable of continuing. Therefore retiring later is not an option for this group".

Altmann agrees people are going to have to keep working longer: "If they are to have any hope of a decent retirement income", and claims the key is to: "Rethink the whole concept of retirement".

She says: "We have to get real. Most people will never be able to save enough during a normal working lifetime to support them at a decent level for what is thought of as a normal retirement. Most young people enter the labour market in debt, take on more debt for house purchase and can't think about saving in a pension till much older. Things will have to change."