The latest findings from the Saltus Wealth Index reveal that nearly a third of High Net Worth Individuals (HNWIs) have either reduced their pension contributions or plan to do so in the next six months, primarily due to the increasing cost-of-living crisis and mounting pressures on their finances.
This reduction in pension payments, averaging £1,246 a month, could put their retirement plans at risk.
The majority of HNWIs (84%) are already experiencing or expecting a significant increase in their mortgage rates, putting a strain on their cash flow.
Consequently, many are slashing pension contributions and cutting personal spending to balance out these immediate pressures, leaving them with smaller pension pots than planned.
The study also indicates that most HNWIs are underestimating the pension pot needed for a comfortable retirement, believing they need an average of £578,313, while in reality, they will likely require almost £700,000 plus the full state pension.
Mike Stimpson, partner at Saltus, said: “The fact that many HNWIs are cutting their contributions to help cover their mortgage repayments in the short-term means their already too small pension pots could be at further risk.
“For a comfortable retirement, it is estimated that a single person needs £37,300 a year, and to achieve that you’d need a pension pot of £932,500. Even with the full state pension – which will be £10,600 in FY23/24 – you’d still need almost £700,000 in your pension to make up the shortfall. So, most HNWIs are underestimating what they’ll need by more than £120,000.”
He further warned that cutting pension contributions should be a last resort, stating: “Pensions are one of the most phenomenal vehicles for growing your money. If you’re a higher-rate taxpayer, the potential tax saving is equivalent to a 72% return just by putting the money into a pension. So, cutting contributions should be a last resort.”
However, the government’s recent decision to abolish the Lifetime Allowance (LTA) from April 2023 could benefit HNWIs who may have underestimated their pension pot needs. This change may prompt many to reconsider their pension contributions, particularly those who previously abandoned employer contributions due to their LTA position.
Stimpson concludes: “The Lifetime Allowance (LTA) changes announced in the Budget are welcome news for pension savers. We are likely to see many people review their pension contributions as a result – even more so if they’ve given up employer contributions in the past due to their LTA position.
“This could be a boon for people who may have underestimated how much they need saved away for their retirement. Another benefit of the LTA changes is that you can also backdate pension contributions by up to three previous years, including the year you’re in, meaning pension holders that had already reached the LTA could potentially be looking to invest up to £180,000 into their pensions in the next few months.
“However, we would urge people to be mindful that these rules could change again in the future and be sure to also consider other wrappers to maximise tax efficiency to help pave the way for a comfortable retirement.”
