Ryan FowlerTaking extended breaks from the workforce or retiring early can severely impact one’s pension pot, a new analysis by Standard Life, part of Phoenix Group, has revealed.
The study highlights that exiting the workforce at 50 without returning could reduce one’s pension by nearly £150,000. Specifically, a break of five years at this age could result in a £48,000 reduction, while a ten-year hiatus could mean £94,000 less by the age of 66.
The findings come amid a notable rise in economic inactivity in the UK since the onset of the Covid-19 pandemic, particularly among those over 50.
Reasons for leaving work range from health issues to personal lifestyle choices. However, the financial consequences of such decisions are considerable, as illustrated by Standard Life’s scenarios which assume a starting salary of £25,000 at age 22 with minimum auto-enrolment contributions.
Gail Izat, managing director for workplace at Standard Life, said: “The number of people neither working nor actively seeking work in the UK has increased recently, particularly among the over-50’s. Though Ill-health and disability are cited as common reasons for people being economically inactive, the issues behind the ‘Great Resignation’ trend are complex and diverse.
“Research from Phoenix Group’s longevity think tank Phoenix Insights – comparing attitudes to work in the UK with Germany and the US – found over 50’s were typically less positive about their experience in the workplace.3 For employers looking to retain their later-career employees, or keen to attract skilled older workers back into the workforce, considering a flexible working policy including flexible hours, home working and carers leave could help to create an age-inclusive environment.
“While not everyone may be able to continue in work, our analysis shows that taking extended time out from work can lead to people having significantly less in retirement. Factors driving the disparity range from the power of compound investment growth, the fact that people are likely to be better paid later in their career, and that pension contributions in people’s fifties and sixties can be highly valuable.
“Through the use of targeted communications, as well as giving people the option of seeing all their finances in one place through tools like open finance, employers can help people gain an idea of the standard of living they’d like in retirement, and the pot size necessary to achieve it. This can then help them to make a decision about when it’s right for them to retire or leave the workforce, as well as boosting their financial wellbeing throughout their career.”
