Cost of living crisis damaging savings plans of millions of young people

Tom Selby
16 May 2022

With inflation forecast to hit an eyewatering 9% this week, new research* reveals the cost-of-living crisis is threatening to have a destructive impact on the long-term savings plans of young people in Britain today:

Pensions

•    15% of people aged 18-34 have already cut back on their pension contributions due to the cost-of-living crisis
•    Alarmingly, a further 1 in 4 (25%) of those in this age bracket are considering cutting back on pension contributions
•    This is almost double the number of people aged 35-54 who have either cut back (10%) or are considering cutting back (11%) their pension contributions 
•    AJ Bell analysis shows for a 30-year-old on a salary of £30,000 contributing 8% to their pension, pausing contributions for 3 years could cost them £15,000 when they reach state pension age (68)**

ISAs

•    A similar proportion of people aged 18-34 have either cut back (16%) or are considering cutting back (22%) their ISA subscriptions in response to rising prices
•    Again this is significantly higher than older generations (full results below)
•    Someone saving the maximum of £4,000 a year into a Lifetime ISA to save for a house deposit will find themselves over £21,000 worse off if they delay contributions for 3 years***

•    Energy use, clothes and leisure activities are the top 3 areas millions of Brits are cutting back on (see table below)

Tom Selby, head of retirement policy at AJ Bell, comments:

“Millions of Brits are being forced to tighten their belts across all areas of their lives in various ways as inflation continues to spiral. 

“With some expecting price rises to hit double-digits this year, people are cutting back on everything from their home energy use, clothes shopping, trips to the cinema, holidays, subscriptions and, of course, their food shop.

“It is not just day-to-day spending that is in the firing line, however – millions of people are considering sacrificing saving for the future too. 

“While people of all ages have either cut back their pension contributions or are thinking of doing so in the face of the cost-of-living crisis, it is younger savers who are the most likely to jeopardise their retirement savings. 

“In fact, 1-in-6 people aged 18-34 have already cut back the amount their put into their pension and alarmingly a further one in every four people are considering cutting back.

“For those who have already cut back saving, it is important to sit down and get a plan in place to increase contributions again when you feel you can afford to. 

“For anyone thinking about reducing the amount they put in their pension or ISA, it is vital to understand the potential implications of that decision.”

Short-term savings could have a long-term impact

“For those struggling to make ends meet there will be an obvious temptation to either reduce the amount you save for the future or stop saving altogether. 

“This is particularly the case for younger people, for whom retirement might feel a long way – likely decades – in the future and things like saving for a home, raising children or simply spending money and enjoying life today are deemed more important.

“However, anyone thinking of stopping saving needs to understand how this will affect them further down the line.”

Examples

“Take a 30-year-old earning £30,000 a year who is considering whether or not to opt-out of the company pension scheme. 

“If they stayed in the scheme and 8% of their salary went into a pension, they could have a fund worth £289,000 by their 68th birthday. However, if they delayed saving for 3 years then they could end up with a fund worth £274,000 at age 68 – a whopping £15,000 less. 

“They would also be turning down free money for those 3 years in the form of a matched employer contribution, as well upfront tax relief. Crucially, their fund would also have 3 years less to benefit from tax-free investment growth.

“Delaying short-term saving in ISAs by the same amount of time will have an even more devastating impact. Someone planning to save £4,000 a year for a house deposit in a LISA – which benefits from an upfront 25% bonus, meaning their £4,000 subscription would be topped up to £5,000 – could end up with £21,000 less after 10 years.

“Of course, for some people saving in a pension or ISA will simply be unaffordable right now. But it makes sense to sit down, figure out your outgoings and incomings, and work out exactly what you can afford to spend and invest, both today and for the future.”

*Source: AJ Bell survey conducted by Opinium of 2,000 nationally representative UK respondents between 29/04/22 – 02/05/22
**Assumptions: Salary rises by 2% per year, investment returns = 4% per year, 8% pension contribution based on total salary
***Assumptions: Figures stated show projected LISA returns on £4,000 initial subscription, investment returns = 4%, over 7 years vs 10 years

 

Survey results

Areas people have cut back or are considering cutting back spending to help with the cost-of-living crisis:

Area

Cut back

Considering cutting back

Gas and electricity usage

40%

27%

Clothes shopping

40%

22%

Leisure activities (ie eating out, cinema)

33%

23%

Food shopping

29%

26%

Holidays

25%

21%

Driving

25%

19%

Entertainment subscription services (ie TV streaming, magazines)

22%

25%

Cash savings

24%

19%

ISA subscriptions

12%

12%

Gym membership

11%

9%

Pension contributions

9%

12%

 

Pension contributions breakdown:

 

 

Gender

Age

Total

Male

Female

18-34

35-54

55+

I have already cut back on this

9 %

11 %

6 %

15 %

10 %

3 %

I am considering cutting back on this

12 %

14 %

9 %

25 %

11 %

3 %

I am not considering cutting back on this

30 %

33 %

28 %

32 %

44 %

17 %

I do not have this

42 %

35 %

48 %

22 %

28 %

67 %

Don’t know / Prefer not to say

8 %

8 %

8 %

6 %

8 %

9 %

Question asked: "Which of the following areas have you cut back spending or are considering cutting back spending to help with the ongoing cost-of-living crisis - Pension contributions?"

 

ISA subscriptions breakdown:

 

 

Gender

Age

Total

Male

Female

18-34

35-54

55+

I have already cut back on this

12 %

13 %

11 %

16 %

12 %

9 %

I am considering cutting back on this

12 %

16 %

9 %

22 %

11 %

6 %

I am not considering cutting back on this

23 %

26 %

20 %

26 %

19 %

23 %

I do not have this

47 %

39 %

54 %

28 %

52 %

55 %

Don’t know / Prefer not to say

6 %

6 %

7 %

7 %

5 %

6 %

Question asked: "Which of the following areas have you cut back spending or are considering cutting back spending to help with the ongoing cost-of-living crisis - ISA investments?"

Tom Selby
Head of Retirement Policy

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

Contact details

Mobile: 07702 858 234
Email: tom.selby@ajbell.co.uk

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