In March 2003, as coalition troops entered Iraq to bring the first Gulf War to an end, I was scraping together every spare pound that I could get my hands on, and stuffing it into my ISA before the end of the tax year.
There were two reasons. First, having hit a (then) all-time high of 6,930 at the end of December 1999, just before the dotcom crash, the Footsie had sunk to 3,287 on 12 March 2003, just before the Iraq invasion. Equities were on the floor, in other words – and bargains beckoned.
And second, I was all too aware how my pension and ISA savings had suffered in the stuttering economy of the early 2000s. For me, the 1990s had been fairly generous — but the early 2000s, coupled to the collapse of troubled insurer Equitable Life, in which my pension had been invested, were markedly less so.
The lows of early 2003 looked to be an opportunity to redress things a little — an escape route into a more prosperous future, in short.
Soaring Footsie
I was lucky: the Footsie’s 3,287 on 12 March 2003 marked the market’s nadir. It closed the year up 18%, and burst through the 5,000 level in February 2005.
And by the 2007 financial crisis in June 2007, the Footsie was at 6,732 — more than twice its March 2003 level.
As I say, I was fortunate. But others today may be less so, as two recent surveys make clear.
Pressured consumers
In mid-July, pensions saving firm Standard Life put out some research showing the extent to which consumers were suffering from rising prices. Over three quarters, it reckoned, were expecting to cut back on spending or saving.
Standard Life’s clear message: try hard to make those cuts as cuts in spending, not saving. A 35-year-old stopping pension contributions for one year, it calculated, would wind up with a pension pot £12,764 smaller. Stop for two years, and the hit would be £25,335.
Come early August, and Canada Life — another pension saving firm — issued its own survey findings. 5% of UK adults had already stopped contributing into their company pension due to the cost‑of‑living crunch. And a further 6% reported that they were actively thinking about pausing their pension contributions, also.
Triple-whammy
But stopping pension contributions — as opposed to ISA contributions, say — is a really bad idea.
As Canada Life points out, the costs extend beyond the contributions themselves.
Those of us who save every month in Self-Invested Personal Pensions (SIPPs) would lose the valuable government-funded tax relief, for instance — additional funding that gets directly added to your SIPP, helping it to grow further and faster.
Those of us who save in their employer’s pension schemes lose out not only in terms of the tax relief, but also their employer’s matching contributions.
Someone aged 40, suggests Canada Life’s modelling, and earning £50,000 and saving 8% of salary, would wind up with a pension pot worth 4% less for every year of contributions missed.
Rear-view mirror
Even so, you might think that — while it’s doubtless tough for the individuals themselves — if just 10% or so of pension savers are having to suspend their pension savings contributions, the problem is manageable.
But it’s worse than that. Canada Life’s survey took place in April. Standard Life’s survey took place in May. Several months ago, in other words.
It’s now the end of August, and inflation is over 10% — and set to climb higher. (Investment bank Citibank is projecting 18.6% in January, for example.) And any day now, Ofgem will announce the level of October’s energy price cap — and by mid-September, most of us will have been informed what it means to our energy costs.
The clear inference: by late September, many more people will be thinking of slashing their ISA and pension savings contributions.
What to do?
What should you do, if you’re in this unhappy position? Obviously, we’re all cutting back, and you should only be contemplating slashing your savings after other household budgeting economies have been made.
In particular, carefully consider the opportunity cost of major expenses: that foreign holiday is attractive, to be sure, but would you rather have a more comfortable retirement instead?
Three things to think about:
- Aim to reduce monthly savings and investment contributions, rather than stopping them completely. Your provider will be quite accustomed to this, and all it takes is a letter.
- Cut back non-tax advantaged saving and investing before impacting tax-advantaged savings and investment vehicles such as ISAs and pensions.
- Consider cutting back all forms of saving and investing (ISAs and ordinary brokerage accounts, for instance) before cutting back on employee pension scheme contributions — because of the valuable employer’s contribution, which might otherwise be lost.
