Squeezed Britons opt out of pensions

Hundreds of thousands of Britons have taken a holiday from their personal pension contributions, in further proof of the severity with which household budgets have been squeezed by the economic downturn.

The latest data from HM Revenue & Customs show that contributions to personal and stakeholder pensions fell by more than £1bn in the 2009-10 tax year.

As many as 430,000 fewer UK residents put money away for retirement through these vehicles in the last tax period, a fall of 4.5 per cent, according to the Revenue’s estimates.

The decline in pension savings in the UK appears to be turning into a long-term trend. Since the 2007-08 tax year, as many as 730,000 fewer UK residents are putting money into personal and stakeholder pensions, while total pension contributions have dropped by more than £2bn, according to the Revenue’s data.

It showed that £18.2bn was contributed to private pensions, including personal pensions and stakeholders, in the 2009-10 financial year, down from £19.26bn during the previous 12 months.

Tom McPhail, head of pensions research with brokers Hargreaves Lansdown, attributed the shortfall to middle-class Britons’ tendency to favour short-term savings arrangements which have a more immediate impact on households’ bottom lines.

“When people are worried about job security, there’s a tendency to divert savings into shorter-term arrangements such as individual savings accounts, or to reduce mortgage debt,” Mr McPhail said.

Experts believe the losses underline the importance of the auto-enrolment rules, coming into force in 2012, which will see employers forced to pay into a private pension for their employees, or use the government’s new National Employment Savings Trust (Nest) pension scheme.

The minimum employer contribution will be 3 per cent of salary and employees will be enrolled once they earn about £7,500 a year – though they will pay contributions on earnings above roughly £5,700. Staff will put in a minimum of 4 per cent of pay up to a maximum salary of £33,500 in 2006 prices. Tax relief will add 1 per cent.

Nest will have an annual cap on contributions of £3,600 a year, and a ban on transfers in and out – although the independent pensions review says the cap and the ban should go in a few years’ time.

All employers will have to offer a pension at least as good as Nest, or use the scheme. About 750,000 will have to provide a pension for the first time and are likely to take the latter option.