Why did pension pots for over 55s plummet during Covid?

Five years have passed since the coronavirus pandemic emerged, claiming millions of lives, and wreaking havoc on national healthcare systems and economies.

Thankfully, Covid is no longer considered a health emergency, but its impact on our finances will be felt for some time yet.

Striking evidence of the pandemic’s punishing effect on the UK’s retirement savings landscape is laid bare in the Office for National Statistics’ (ONS) updated Wealth and Assets survey.

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Between April 2020 and March 2022, the average pension pot for savers aged 55 to 64 plummeted 27% from £189,700 to £137,800, while the average savings for those aged 65 to 74 dropped from £190,000 to £145,900.

Average pension pots by age

Source: ONS Wealth and Assets survey.

The sharp fall here is worrying. Not least because a new study by behavioural finance experts Oxford Risk found that half of people aged over 55 – the equivalent of more than 10.5 million people – are worried that their retirement savings will not last the distance.

According to calculations by the Pensions and Lifetime Savings Association (PLSA), a pot of at least £300,000 is needed to fund a moderate lifestyle in old age. As such, one would hope that savings increase over time, like they did for 55-to-64-year-olds between 2010 and 2020, rather than tumble.

So, what’s going on here? And what can you do to boost your savings as retirement approaches?

The impact of Covid on our retirements

We can only speculate as to why retirement pots shrunk, but it’s worth digging into, nonetheless.

Several shifts occurred during Covid that could have impacted the size of older savers’ retirement pots.

One is that lots of people either paused or reduced pension contributions to support their finances. Research from Legal & General Retail Retirement in 2021 found that 1.7 million workers aged over 50 were saving less for their retirement due to the pandemic, decreasing payments by £142 a month on average.

But this alone can’t possibly explain such a stark fall in average pot size for older savers. Especially given that the impact of reducing or halting contributions has the biggest impact over longer time frames due to lost compounding.

Another consideration is investment performance – many global markets tanked in the spring of 2020. But as a recovery was quick to ensue, those who stayed invested would’ve seen their retirement pot rebound.

Perhaps the biggest factor was owing to people raiding their savings earlier than expected. It seems likely given that the earliest you can draw from your pensions is age 55.

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We know that many workers chose or felt forced to retire early during the pandemic. And these people weren’t necessarily packing up work in financial comfort. A study by the Institute for Fiscal Studies (IFS), found that almost half of adults who left the workforce in 2020-21 retired in relative poverty. Diving into their pension savings may have been the only way to keep their heads above water.

Xiaowei Xu, a senior research economist at the IFS, said: “It is often assumed that older people who left the workforce during the pandemic were wealthy individuals retiring in comfort. Our analysis shows that those who left in the first year of the pandemic experienced a sharp rise in poverty, despite overall poverty rates falling that year, and also suffered large falls in well-being.”

Interactive investor’s own research provides evidence that during Covid people accessed their pension savings earlier than before.

Average age that savers accessed their ii SIPP

Source: interactive investor.

The average age of those kickstarting regular income from ii self-invested personal pensions (SIPP) fell from 66 to 62 between January 2018 and December 2023, while the average age for drawing the first tax-free lump sum dropped from age 62 to 60 during the pandemic, before nudging up to 61.

How to make up for lost time

If you’re approaching retirement and your savings are a little short, either because you accessed your pension during Covid or for some other reason, and retirement is heaving into view, there several ways to get closer to where you want to be. Here are six things to consider.

1) Maximise your workplace pension

One of the most efficient ways to boost your retirement income is to maximise your workplace pension. By law, employers must contribute 3% of qualifying earnings if you contribute 5%, but many are far more generous. If you need to make up for lost time or purely want a simple way to supercharge your savings, speak to your employer about how much they’re prepared to pay in – you might have to contribute more too, but it’s a great way to get some free money.

2) Embrace tax year end

If you’re staring down the barrel of an unwanted tax bill this year, paying a lump sum into your pension by 5 April can be a savvy thing to do.

That’s because pension contributions reduce what’s called your “net adjusted earnings”. So, if you earn £60,000 and pay £5,000 into a pension (which would cost you £4,000 due to tax relief) your income falls to £55,000, meaning you save 40% income tax, equating to a tidy £2,000. Note – you may need to claim £1,000 of this back via self-assessment next January.

The upshot is that you can both trim your tax bill and immediately boost your long-term savings. And if your income falls into either the 60% tax trap or high-income child benefit charge, the effective tax savings could be even greater.

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3) Use carry forward if you have sizeable lump sums

Most people can pay the lower of £60,000 or 100% of earnings into a pension every year and get tax relief at their marginal rate (the tax you pay on the next pound you earn). This is called the annual allowance.

But let’s say you have a particularly large lump sum, perhaps from an inheritance, that you’d like to tuck away. Provided you were a member of a registered pension scheme during the past three years, you can carry forward any unused allowance from this period. So, in theory, you could potentially pay £200,000 into your pension before April and get tax relief on the whole lot, as long as you don’t exceed 100% of your income.

4) Watch out for the money purchase annual allowance

If you’ve already made a taxable and flexible withdrawal from your pension, such as via a SIPP, tax-relievable pension contributions are restricted to £10,000. This is known as the money purchase annual allowance (MPAA) and may pose a problem for anyone forced to raid their pension during Covid but who has returned to work and wishes to restart contributions. Unfortunately, you can’t use carry forward if you’ve triggered the MPAA.

However, if you’ve only drawn from the 25% tax-free element of your pension, the MPAA doesn’t apply; the standard £60,000 annual allowance does.

5) Consider bonus sacrifice

If you’re lucky enough to receive a work bonus this year, and your retirement savings are light, then sticking it into your pension can be a savvy move.

Some employers offer something called bonus sacrifice. This is where you trade all or some of your bonus for a pension contribution. As it’s paid directly into your pension, you’ll save both income tax and national insurance (NI). The combined bumper saving here depends on which tax bracket the bonus falls into.

• Basic-rate taxpayers save 28% (20% income tax, 8% national insurance)
• Higher-rate taxpayers save 42% (40% income tax, 2% national insurance)
• Additional-rate taxpayers save 47% (45% income tax, 2% national insurance)
• If the bonus pushes your income above £100,000 and into the 60% tax trap, the saving could be 62% (40% income tax, 20% retained personal allowance, 2% national insurance)

6) Review your current investments, including costs

The best strategy to boost your future wealth is to increase how much you save and invest. However, if money’s tight right now for any reason, there are other ways to make a difference.

Two simple ways are to review your current investments and check how much your fees are.

This might involve switching to investments that carry a bit more risk. A common example here is your workplace pension default fund. These can differ wildly from employer to employer. Some are cautious, others adventurous, most are somewhere in the middle.

But either way, default funds are never personalised. Make sure yours is right for you.

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While you’re in the process of checking your investments, it’s worth reviewing your charges too. These include fund/trust costs and trading fees and any platform fees if you hold a SIPP.

High fees can really mount up over time, eating away at your investment growth, and giving you less money to spend in your golden years. Look out for your future self and keep fees low where possible.