Today’s economic climate poses some serious challenges for people’s finances.
The coronavirus pandemic alone poses a large threat. With millions of people finding themselves on furlough, or being made redundant, thousands of UK households’ finances will likely become extremely strained in the months ahead.
And already this month more pressure has been placed on consumers’ finances. Firstly, the Bank of England decided to keep interest rates at a historic low of 0.1%; and this was swiftly followed by the announcement that the UK had officially entered into a recession.
That said, confirmation that the UK is in recession was expected. And the news that the economy contracted in Q2 2020 (for the second consecutive quarter, thereby officially marking the start of a recession) actually masks the fact that there was already growth in the months of May and June, albeit small growth.
Nevertheless, the current circumstances inevitably generate a great deal of uncertainty. Thus, it has become more difficult to plan for the future – particularly when it comes to retirement planning. Unfortunately, this can lead to a great deal of panic.
What causes pension panic?
Pension panic is a common feeling among those approaching retirement age; and it is usually caused by a lack of understanding about how their pension works. Indeed, a recent survey of over 2,000 UK adults commissioned by My Pension Expert revealed that almost a third (32%) of respondents do not know how their pension works, or where it is being held.
Furthermore, our research found that almost one in ten (9%) Britons aged between 40 and 67 have been pushed into and willingly taken early retirement as a result of the pandemic. Worryingly, over two fifths (42%) of this age bracket have yet to develop a clear retirement plan.
Unfortunately, this knowledge gap, coupled with economic turmoil, creates the perfect storm for pension panic. This can, in turn, lead to detrimental financial decisions.
Poor decisions
It is common for most ill-advised decisions regarding retirement finances to be driven be a fear of not having enough money to retire on.
Indeed, over one in ten (12%) of those surveyed by My Pension Expert admit to moving some or all of their pension pot into a more high-risk investment in 2020 with the hope of increasing its value. Meanwhile, the financial pressures caused by the coronavirus pandemic have led to 6% of people aged 40 to 67 to withdraw money from their pension without seeking advice.
Such strategies are risky and could result in consumers unwittingly emptying their pension pot.
Protecting your pension pot
Positively, there are ways consumers can safeguard their pension pot. Firstly, there is an option to temporarily pause pension withdrawals. Most drawdown schemes allow clients to keep a few years’ worth of savings separate from their pension investment – this means they are able to leave the value of their investments to stabilise, without being left out of pocket.
That said, this route may not suit everyone. In this case, consumers could consider switching from fixed sum to fixed percentage withdrawals. This means consumers will be able to withdraw a percentage of whatever it left in their pension pot, rather than taking out a fixed lump sum. While it might result in a short-term decrease in income, it will reduce the amount being withdrawn over time, thereby ensuring retirement savings last longer.
Consider alternatives
Consumers must remember they are not wedded to their existing retirement income provider. On the contrary, they have the freedom to investigate different options to suit their circumstances.
For consumers looking to access extra cash, equity release might be a valid option. This term refers to a range of products which enable homeowners aged over 55 to access cash tied up in their primary property. Equity release can come in the forms of a lifetime mortgage, when a consumer takes out a mortgage on their primary residence while still maintaining ownership; or a home reversion, when individuals sell part or all of their home to a reversion provider in return for a lump sum or regular payments.
Alternatively, consumers could use part or all of their pension pot to purchase an annuity – a product which offers retirees a guaranteed income for life (or for a pre-determined period of time). This option could be particularly useful for those who struggle to keep track of their pension investments and crave the reassurance of a regular income.
Making an informed decision
Of course, these options will not be right for everyone; so, it is vital that consumers do not to rush into a final decision.
Instead, pension planners must seek independent financial advice. Advisers will be able to simplify the complex retirement finance options on the market and help people understand which route suits their circumstances.
Further, FCA-regulated financial advice safeguards consumers’ financial situation. Put simply: if a consumer follows an advisers’ recommendations but this leaves them worst off, the adviser in question must reinstate their original financial position. Such security enables consumers to explore their various options with confidence.
Today’s economic uncertainty inevitably poses challenges for millions of UK consumers. However, it is important that consumers remain calm and avoid making rash decisions. Instead, they should seek expert advice. Taking the advised route will not only protect their hard-saved cash but it will help them to achieve the financially secure retirement they deserve.