Workers taking extended unpaid leave could face a financial fallout far beyond their personal budgets, equating to a collective £230.69bn shortfall in pension pots nationwide if two years of unpaid leave is taken, Barnett Waddingham has found.

Research from the firm found that around a third of UK workers (nine million individuals) have taken or are planning to take an extended leave from work, whether this is a shorter-term sabbatical (30 per cent) or a longer career break (33 per cent).

The consultancy explained that workers taking extended unpaid leave could face a financial fallout far beyond their personal budgets, equating to a collective £230.69bn shortfall in pension pots nationwide if two years of unpaid leave is taken.

Once seen as a luxury, sabbaticals are increasingly becoming a desired option for those seeking to manage their well-being and personal growth.

Meanwhile, others are opting to temporarily take a break from their careers to focus on professional development or to resolve personal health issues.

The growing trend of taking an extended leave is shaped by age, as Barnett Waddingham’s research showed that younger workers are far more inclined to step back from their careers in pursuit of personal goals.

Indeed, the youngest adults, those aged 18 to 24, are the most inclined to take a career break, with 34 per cent planning a sabbatical and 29 per cent planning to take an extended career break.

Meanwhile, 16 per cent of those aged 25 to 34 have already taken a sabbatical, and 26 per cent are planning to do so.

Under a fifth (22 per cent) of this age cohort have already taken an extended career break, and 23 per cent are planning to.

However, as age increases, the popularity of taking an extended leave decreases, with 13 per cent of those aged 45 to 54 planning to take a sabbatical and 9 per cent an extended career break.

Interest in taking a career break drops even further for those aged 55 and over, as 6 per cent are planning a sabbatical, and 5 per cent an extended career break.

Despite the appeal for extended leave growing, the consultancy warned that there are long-term financial implications, particularly regarding pension savings, that younger professionals may not fully consider.

For example, an unpaid one-year career break at age 30 could lead to a 2.7 per cent shortfall in a saver’s pension pot if they retire by age 66, roughly equating to £15,941.

If this break extends to two years, it would lead to a 5.4 per cent or a £30,688 shortfall of a projected retirement fund at age 66.

The research showed that this financial impact is lessened for those closer to retirement, as taking a two-year break at age 40 results in a £25,319 (4.5 per cent) shortfall, while at age 50, this falls to £20,889 (3.7 per cent).

The difference in this is due to time, as younger people lose more due to compounding returns missed over their career.

However, Barnett Waddingham said that these shortfalls can be addressed by increasing monthly contributions upon returning to work.

A 30-year-old can offset their pension shortfall from a two-year career break by increasing their monthly contributions by just 0.6 per cent annually upon returning to work.

Meanwhile, for a 40-year-old, it’s 0.8 per cent, and for someone aged 50, 1.3 per cent is needed.

The firm stressed that this means that the younger savers are, when taking a career break, the more important it is for them to act early to correct the financial trajectory.

It also suggested that as sabbaticals become more mainstream, companies may need to adapt their policies to support their workers.

“We are witnessing a shift in how employees approach their careers, with many taking breaks earlier to support their mental health, personal growth, or long-term productivity,” Barnett Waddingham partner, Paul Leandro, said.

“But this choice comes with hidden risks- taking just a two-year break at age 30 can result in a pension shortfall of over £30,000 by retirement, or the equivalent of an entire year’s moderate income by the Pensions and Lifetime Savings Association's Retirement Living Standards.”

However, he said “thankfully” modest increases to pension contributions can bridge the gap, but noted that at a time when pension engagement is already low, there’s a “significant” concern that many remain unaware of this issue.

“The traditional career path has evolved, but this can’t come at the cost of people’s retirements,” he said.

“Businesses embracing this shift will attract and retain top talent, but should also play an active role in preventing these shortfalls.

“Challenges such as these must be front and centre in the ongoing pensions review to ensure that retirement adequacy is equal for everyone.”

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