Income Protection Providers Need to Allow Extra Cover for Pension Contributions

Significant loss in take home pay with income protection

Such large reductions in take home pay mean that it is often only possible to cover a client’s essential outgoings – such as their mortgage/rent, council tax, utility bills, food, travel and childcare costs etc, with very little room for other outgoings, such as pension contributions.

Incapacitated in working life and broke in retirement

If someone suffers a long period of incapacity and has income protection then they will be able to pay for all their essential outgoings but it is unlikely they will be able to save enough for retirement, especially with such a large fall in take home pay whilst claiming income protection benefit.

For example, for someone on £36,000 per annum a sensible total pension contribution would need to be around 10% of annual income. This amounts to £300 a month and this extra amount would often be difficult to cover in full with income protection given the current cover/income limits.

Without being able to save sufficiently for older age it is likely that someone who needs to claim long-term on their income protection policy could face a life of poverty when the policy term ends and payment stop.

Missed pension contributions can amount to tens of thousands

For example, assuming a net investment growth rate of 5% per annum, if someone missed being able to contribute £300 per month in the 5 years before retirement this could amount to lost retirement savings of around £20,000.

If someone needed make a long-term income protection claim and missed being able to afford pension contributions of £300 per month for 20 years before retirement, they could have a staggering £124,000 less in their pension pot to fund retirement.

 

Whether a client is working or claiming on their income protection policy there is still a huge need for them to be able to save sufficiently for retirement.

For someone that may never be able to go back to work, income protection is their financial lifeline, but what do they do after the policy term ends and their benefit payments stop? Their bills certainly don’t stop coming in.

If income protection providers allowed an additional amount of cover for pension contributions then someone who’s unfortunate enough to become long-term incapacitated would still be able to fund life after their income protection policy ends.

Tom Conner
Director at Drewberry