A third of HNW individuals cutting pension contributions due to rising mortgage rates

A third of high net worth individuals (HNWIs) have either cut their pension contributions or plan to in the next six months to balance pressures on their day-to-day finances, including rising mortgage rates, according to the latest research from Saltus.

The research found that people with assets of £250,000 or more are more likely to have reduced their pension contributions within the past six months – one in seven (14%) have – compared with only 9% across the population as a whole. Saltus also found that, of those who have not already cut their pension contributions, a further 14% plan to in the next six months.

HNWIs who already have cut their pension payments – or plan to – have done so by an average of £1,246 a month, a reduction of almost £15,000 a year.

As the cost-of-living crisis bites, the majority of HNWIs (84%) are already experiencing or expecting an increase in their mortgage rates to put a strain on their cash flow.

The findings also suggest the vast majority of HNWIs are underestimating what they will need in their pension for a comfortable retirement; on average they think they’ll need a pension pot of £578,313 to give them a comfortable retirement but, in reality, they are more likely to need almost £700,000 plus the full state pension – for which 30% don’t think they will qualify.

Despite many already cutting or planning to reduce their pension contributions, some HNWIs are bucking the trend with nearly a fifth (18%) intending to start contributing more.

The Government’s recently announced plans to abolish the Lifetime Allowance (LTA) could come as welcome news to the vast majority of HNWIs who may have underestimated the size of their pension pot needs, with many now likely to be reconsidering how much they could top up their pensions with during the years to come.

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.

“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.

“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.”