Many UK consumers are understandably unsettled by today’s economic climate.
The coronavirus pandemic alone has caused major unrest, particularly across the UK jobs market. Indeed, many UK households will see their income drop as a consequence of being furloughed or, worse still, being made redundant.
However, even more pressure has been applied to consumer finances throughout August. Firstly, the Bank of England deciding to keep interest rates at a low of 0.1%. This was swiftly followed by news that the UK had formally entered into a recession; whilst not unexpected news, it has still dealt a significant blow to consumer confidence.
In such challenging times, planning for the future may seem like an impossible task – especially when it comes to one’s retirement finances. This can create a significant deal of panic amongst consumers.
The driving force of pension panic
Economic uncertainty aside, one of the main driving forces of pension panic is a lack of knowledge of one’s own pension plan. Tellingly, a recent survey of over 2,000 consumers conducted by My Pension Expert revealed that almost a third (32%) of respondents have no idea where their pension is being held or how it works.
This is particularly worrying, given the rapidly changing employment status of many Britons nearing, or at retirement age. Almost one in ten (9%) of consumers aged 40-67 have been pushed into early retirement since March 2020. Worse still, two fifths (42%) of this age group have no retirement strategy in place.
A pension knowledge gap teamed with economic uncertainty inevitably breeds financial irrationality. Thus, many consumers are left vulnerable and more likely to make damaging financial decisions.
For many people approaching retirement age, there is a fear that their pension pot is not as valuable as they might have hoped. Understandably, such fear has become more common in recent months, as markets decline, and the value of pension investments fall. Consequently, we see more consumers looking to shift some or all of their pension pots to extremely risky investments in a bid to increase its value. Indeed, one in eight (12%) of adults admit to doing this according to My Pension Expert’s research.
Others react differently to the pressure and attempt to remove some of their pension pot from investments entirely to avoid the value slipping even lower; as was the case for 6% of those aged 40-67, who did so without seeking financial advice.
These actions are particularly concerning, as they suggest that consumers are at risk of unknowingly draining their pension pot. What’s more, without adequate guidance, it may be too late before they realise there is an issue.
Protecting pension funds
Vitally, consumers must not panic and withdraw cash from their pension pot. Instead, there are steps which can be taken to ensure that their pension pot maintains a healthy balance.
Firstly, consumers might consider pausing their pension withdrawals. The majority of drawdown schemes allow clients to hold a few years’ worth of cash separately from the rest of their fund. This means that in economic downturns, retirees are able to manage cash flow, whilst leaving the value of their main pension pot to stabilise as markets recover.
However, this option will not suit everyone. In which case, it would be advisable to switch from fixed cash withdrawals to fixed percentage withdrawals. Consequently, consumers will only withdraw a percentage of what remains in their pension pot, rather than taxing out a fixed amount, regardless of the pot’s value. Thus, the pension pot declines at a slower rate. Admittedly, this will mean individuals’ income will be reduced for a short period of time. However, it will aid the longevity of their savings.
Consumers must also remember that they are not wedded to their existing pension provider. On the contrary, they have the freedom to explore a wide variety of retirement finance options available to them.
Annuities, for example, could offer greater security to Britons who struggle to keep up with their investment portfolio. This product can be purchased with part or all of their pension pot and provides the retiree with a fixed monthly income for the rest of their lives (or for as long as is agreed with the annuity provider). This could offer some great peace of mind in times of uncertainty.
Another viable option could be equity release; particularly for homeowners looking to unlock some extra cash from their primary property. Equity release products come in the form of lifetime mortgages, which enable homeowners to takes out a mortgage on their primary residence while still maintaining possession; or home reversions, which allow people to sell part or all of their home to a reversion provider in return for regular payments, or a lump sum.
Of course, these options will not suit every individuals’ specific needs, therein highlighting the importance of seeking independent financial advice before committing to a financial product.
The value of advice
Britons must remember that, no matter their circumstances, they do not have to wade through retirement finance complexities alone. Independent financial advisers will assess all elements of an individual’s financial situation and determine the best retirement options to suit their needs.
What’s more, consulting an FCA-regulated financial adviser ultimately safeguards consumers’ financial positions. This means that, if a consumer follows guidance from an adviser which ultimately leaves them worse off, said adviser is obligated to reinstate their original financial position. With such protections in place, consumers should feel empowered to investigate their various financial options.
In such challenging times, consumers are understandably nervous about their financial futures. But they mustn’t panic and rush into poor financial decisions. Rather, they should remain calm and seek independent financial advice. Doing so will ensure that their retirement finances remain resilient throughout economic downturns.
About the Author
Andrew Megson is the Executive Chairman of My Pension Expert, the UK’s number one Advised Retirement Income Specialist. Founded in 2010, My Pension Expert specialises in providing independent advice to UK consumers about their pension plans – it arranges millions of pounds worth of retirement income options each week.
Notes to Editors
MPE recently conducted research to investigate how consumers are managing their retirement finances in the wake of the coronavirus pandemic. The market research was carried out between 24th and 28th July 2020 among 2,003 UK adults via an online survey by independent market research agency Opinium. Opinium is a member of the Market Research Society (MRS) Company Partner Service, whose code of conduct and quality commitment it strictly adheres to. Its MRS membership means that it adheres to strict guidelines regarding all phases of research, including research design and data collection; communicating with respondents; conducting fieldwork; analysis and reporting; data storage. The data sample of 2,003 UK adults is fully nationally representative. This means the sample is weighted to ONS criteria so that the gender, age, social grade, region and city of the respondents corresponds to the UK population as a whole.