Savings Cut to Cope with Cost of Living Crisis
Almost half of Brits have cut their savings, investments or pensions due to the cost of living crisis, a new NerdWallet study has revealed. But find out what to consider before making any decision that could have a negative impact on your long-term finances.
UK households are facing more financial pressure today than in recent years as the cost of living crisis escalates. And with wages failing to keep up with the rate of inflation, according to data from the Institute for Government for March to May 2022, this has led some consumers to rethink their finances to cover rising expenses.
A new NerdWallet survey of over 2,000 people in the UK revealed that:
- Almost half (46%) of Brits have either reduced or stopped paying into their savings, investments or pensions altogether during the last 12 months.
- One fifth (20%) of households are unsure whether they’ll be able to resume saving at the same level again due to the unprecedented financial insecurity caused by the cost of living crisis.
- More than one in 10 (13%) UK adults have no savings.
Here, we explore how the UK’s financial priorities are changing due to the cost of living crisis and what it means for our financial futures.
Almost half of Brits have stopped saving for the future
One of the most worrying stats from the NerdWallet survey is that 46% of Brits polled have either reduced or stopped paying into their savings, investments or pensions due to the cost of living crisis.
Women are more likely to be affected by the crisis, with 47% reducing how much they save compared to 44% of men.
Similarly, 41% of women said they could not afford to save because their entire income went towards covering basic everyday living expenses. While for men, this fell to 35%.
The table below shows the cost of living crisis has affected the savings habits of women and men in the UK.
Source: NerdWallet UK, August 2022
Breakdown of answers when asked: “When planning for the future have you stopped paying into, or reduced the amount going into savings, investments or pensions, over the last 12 months?” by gender.
Younger generations are struggling to save
The cost of living crisis appears to have hit younger generations the hardest. Over half (59%) of 18- to 24-year-olds reported a reduction in their savings over the last 12 months – much higher than the 36% of respondents in the 45 to 54 age group who have reduced how much they are saving.
The graph below shows how the cost of living crisis has affected different age groups in the UK.
Breakdown of answers when asked: “When planning for the future have you stopped paying into, or reduced the amount going into savings, investments or pensions, over the last 12 months?” by age group
Many turn to short-term financial solutions
As the cost of living crisis escalates, households are turning to short-term tactics to balance their finances.
Almost two thirds (63%) of those surveyed who had either reduced or stopped paying into their savings, pensions or investments intend to contribute again in six months’ time. Meanwhile, 14% said that they hoped to restart their savings after nine or 12 months. However, one in five (20%) stated that they are not sure when they will be able to start saving again.
Some 43% of respondents believed that the financial crisis has resulted in them thinking about their finances on a short-term basis. Those aged 25- to 34-years-old were particularly affected, with over half (54%) adopting this financial outlook.
What could happen if you reduce your pensions, savings or investments?
Making any decisions that might affect your pensions, savings or investments could have a significant impact on your financial situation in the future.
Reducing pension contributions
More than one fifth (22%) of UK adults surveyed were unsure of how to invest in their future. And a further one in 10 feared that they would never have enough money to retire.
Reducing pension contributions may leave individuals with a significant shortfall in their retirement savings. This means that they will have less income to cover everyday expenses when they retire.
Richard Eagling, pensions expert at NerdWallet, said: “Saving for the future is something we all need to do – especially with the state pension age set to rise.
“It is important that individuals understand the potential impact of reducing or stopping their savings, investments or pensions and how this could hamper their attempts to reach their life goals such as a comfortable retirement.
“In particular, those who are planning to cut their pension contributions should not overlook some of the key benefits that a private pension can provide, such as tax relief and employer contributions.”
According to data for April 2022 from pension provider Aegon, a 25-year-old on average earnings of £29,000 and contributing the minimum amount into a workplace pension scheme could miss out on £4,600 by the time they hit state pension age if they took a one-year pension contribution break now.
This increases to a £9,100 reduction in retirement savings if the break lasts for two years and £13,600 for a three-year pause in pension contributions.
» MORE: Pension contributions
Cutting back or stopping the amount you save may seem like a quick way of plugging potential financial shortfalls but not having any, or sufficient, savings may leave you struggling if things don’t go to plan.
It may not always be possible, but if you can, having an emergency fund of between three and six months’ earnings can help give you a buffer for unexpected costs, such as your car or boiler breaking down. Even putting a small amount away in an easy-access saving account each month will build up over time.
Money contributed to savings accounts also benefits from compound interest, essentially where you earn interest on interest. As compound interest grows, so does the value of your savings, even more so when you make regular deposits.
Reducing your investment contributions
Investing, for example in a stocks and shares ISA, is a medium- to long-term investment and can also benefit from compounding, which can help your investments to build value over time. This could mean that regular contributions to your investments increase their worth.
But it is worth remembering with any investments that you may get back less than you invest. And if you are struggling financially, it will likely take longer to access your money from your investments if you urgently need it. You may also have to pay exit or transaction fees to access your money.
» MORE: Getting started with investing
Things to consider before stopping your pensions, savings or investments contributions
It’s worth considering the following steps before stopping your pensions, savings or investments contributions to ensure you have enough money for retirement or any unexpected events in the future:
- Look at your budget: If you haven’t already, creating a budget could help you look for ways that you could free up money that could allow you to continue saving.
- Get support with the cost of living crisis: Where possible, apply for financial support or assistance to help you manage the cost of living crisis. From help with managing childcare costs to Universal Credit designed to support those on low income, visit Gov.uk to learn what benefits you may be eligible for.
- Find out about banking tips and tricks: Does your bank offer savings pots? Or the functionality to round up your money and save? Digital banking features can help you save little and often.
- Make a retirement plan: It’s important to try to understand how much you’ll need for a comfortable retirement. There are many free pension calculators available online to help you estimate how much you might need.
- Access free pensions guidance: MoneyHelper offers free, impartial guidance on your retirement options and if you are over 50, you can also get guidance through the government’s Pension Wise service. It could be worth speaking to your employer to see if you can reduce your pension contributions temporarily rather than stopping them altogether.
If you still find a shortfall in your income after taking these steps, pausing your pensions, savings or investments contributions may help you cover expenses in the short term. But it’s really important to keep re-evaluating your finances so that you restart saving as soon as you can.
Disclaimer: NerdWallet commissioned OnePoll to conduct a survey of 2,000 nationally representative UK adults between 14 July 2022 and 19 July 2022.
Note: The content of this article doesn't constitute advice, but guidance, as some of the things to consider.
Image source: Getty Images
Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more