Urgent action needed to prevent £35 billion loss pension funds

Some 1.5 million pension holders are teetering on the brink of halting their pension contributions in an effort to stave off the effects of the impending recession, according to new research from AXA.

The insurance and pensions giant warns that as much as £34.97 billion could be lost from 1.5 million pension funds if all those with plans to take a pension break stopped contributions for two years.

The AXA figures suggest that one in twelve pension holders feel they will be left with little choice but to take a pension holiday in the next two years, with 35-44 year olds most likely to cut saving.

And according to AXA urgent action is required to discourage people from cutting their pension contributions. The firm says many people feel pension holidays are an easy way to improve their disposable income with few tangible consequences. But taking such action can result in severe long term repercussions that could affect your quality of life in retirement, AXA warns.

Around half (53%) of those planning a pension break said they were doing so to offset the increased cost of living or to clear debts, with a further 13% blaming increased mortgage payments.

The firm's actuaries reckon a two year break could cut a 25 year old man's occupational pension pot by £33,800 when he retires. A 35 year old would be worse off by £28,700 and a 45 year old by £16,900. Even a 55 year old would suffer a £8,500 drop in his occupational pension fund after a two-year break in contributions.

And according to AXA, people with individual stakeholder pensions will suffer a worse fate - a 28 year old man contributing £300 per month into a single life stakeholder pension will end up with £59,700 less in their final pot if they take a two year break. That equates to £1,047 a year less in the value of their annuity payout.

Steve Folkard, Head of Pensions and Savings Policy at AXA, said: "Taking a pension break should be a last resort because of the long term repercussions. If you put £300 a month less into your pension for two years you will have a pension pot that is tens of thousands of pounds short when you retire."

AXA says that the best way to avoid a pension break is to make savings elsewhere. It is launching a new online retirement tool on 20th November to coincide with its My Budget Day initiative. The tool is designed to assess your pension contribution levels and determine whether you can afford to save more for your retirement and is available at axa.co.uk/mybudgetday. My Budget Day encourages people to take control of their finances by spending just one hour a month - or fifteen minutes a week - planning and reviewing their money

Steve Folkard added: "Planning for your retirement isn't just something a 50 year old should do. These calculations prove that even people in their twenties will feel the effects of cutting their pension contributions. Final salary pensions just aren't available to many people now and we all have to realise that quality of life in retirement is affected by actions now.

"My Budget Day can help you take control of those issues. Our online tools can help you to balance your immediate needs with those of your retirement so that you can feel more in control and less stressed about money."