Fewer young workers have been paying into pensions as stubborn inflation, stagnant wages and high housing costs continue to bite.

The number contributing to workplace or private pensions through the relief at source payment method in the 2023-24 tax year was 668,000, or 6.1 per cent down to 10.3 million, from 11 million the year before, according to the latest figures from HM Revenue & Customs. The number of workers aged 20-29 making relief at source pension contributions in 2023-24 fell 7.2 per cent, from 2.6 million to 2.4 million.

Bowmore Financial Planning obtained the figures through a freedom of information request to HM Revenue & Customs. Bowmore said the drop was driven by young people struggling with low wages and high rents.

• Five simple things most savers don’t know about their pensions

Relief at source pensions are taken from net pay after income tax and national insurance deductions. Pension firms will claim back 20 per cent tax relief from the government and add it to the pot. Higher and additional rate taxpayers can claim back extra relief through a self-assessment tax return. The figures did not cover workers who pay into their pension through salary sacrifice.

John Clamp from Bowmore Financial Planning said: “What’s particularly worrying about the drop is that many people, especially those at the very start of their careers, believe that retirement saving is something they can catch up on later.

“In reality, delaying contributions can dramatically reduce the long-term value of a pension, even if higher payments are made further down the line. Small, consistent contributions made early can make a meaningful difference by benefiting from the effects of compounding over time.”

A 22-year old worker earning £25,000 and paying the 5 per cent auto-enrolment minimum into their pension (with 3 per cent from their employer) would end up with a pension pot of about £226,000 at 68. This is assuming investment growth of 5 per cent and inflationary wage increases, according to the investment firm Hargreaves Lansdown.

If this employee stopped making contributions for a year at age 30 they would also lose the employer contribution and their pot would be worth closer to £209,000 at 68 — a loss of £17,000. Helen Morrissey from Hargreaves Lansdown, said: “The steady drip feed of contributions into your pension over the long term is key to building up a good retirement income so taking breaks will have an impact on what you end up with.”

• We don’t want a pay rise’ — the curse of the six-figure salary

A problem for higher earners

Clamp said that higher earners were also underinvesting in their pensions because many were unaware that the 5 per cent of their salary that is put into a pension through auto-enrolment is capped at an earnings threshold of £50,270 — for earnings above this contributions need to be actively increased if workers want to save more into their pension.

An auto-enrolled employee earning £100,000 would make the same pension contributions as someone earning £50,270 if they did not choose to add more than the minimum.

• Why Gen Z is facing a pensions crisis

Clamp said: “What the data really shows is a widening disconnect between earnings and long-term planning. From self-employed workers stepping back under financial pressure to higher earners sleepwalking into under-saving, too many people are relying on the bare minimum in pension savings, which is not going to deliver a comfortable retirement.”

The risk of under-saving for later life comes amid uncertainty over the future of the state pension — the bedrock of many retirements.

From April a full new state pension will go up 4.8 per cent to £12,547 a year, thanks to the triple lock, which guarantees that it rises in line with inflation, wages or 2.5 per cent, whichever is higher. April’s rise is based on wage growth.

Experts, however, say that the triple lock guarantee will make the state pension unsustainable and that it will need to be scaled back for future generations.

A record number of people aged over 66 are still working, with 2.12 million in full or part-time work in the 2024-25 tax year, according to HMRC.