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Is flexibility the key to protecting consumer pension pots?

“Expect the unexpected”, or so the old saying goes. However, even the most diligent pension-planner could not have predicted the events of 2020.

The global pandemic and consequential economic turmoil caught many UK adults unawares. And this is particularly the case when it comes to people’s retirement strategies.

Indeed, this summer My Pension Expert conducted a survey of over 2,000 UK adults which revealed that almost one in ten (9%) employees aged between 40 and 67 had brought forward their retirement as a direct result of the pandemic.

Of course, each individual’s decision to take early retirement will be motivated by different factors. For example, a separate survey of My Pension Expert’s clients in October revealed that while some had no choice in the matter, others decided to leave work to protect their younger colleagues from redundancy.

While this might signify an altruistic approach to employment, perhaps it also suggests a changing approach towards access to retirement finances. After all, it is likely that many consumers might be reluctant to accept early retirement, if this meant all sources of income would dry up completely. 

Changing attitudes towards pensions

Interestingly, many people are viewing their retirement as a short-term outlook, as opposed to a long-term strategy. This is something My Pension Expert’s Executive Chairman, Andrew Megson, discussed on BBC Radio 4’s consumer affairs programme, You and Yours, earlier this week.

By this, we mean that some adults are now viewing their pensions as an instant source of cash when they reach the age of 55. Prior to the 2015 pension freedoms, pension pots were viewed as a means of securing a guaranteed income for life by using it to purchase an annuity. However, attitudes are shifting.

Over the past five years, we have seen increasing consumer demand for greater flexibility, enabling retirees to take out as much, or as little as they want from their pot when they choose to do so. Consequently, more and more retirees are rejecting the rigidity of annuities, in favour of flexible drawdowns.

However, there are risks that come with such flexibility…

De-risking flexibility

While it is understandable that retirees want instant access to their pension pots, this can pose some problems.

For example, with flexible drawdowns, the money adults do not withdraw remains invested, meaning that their pension pot can continue to increase in value. Although, as is the case with investments, their value can also decrease. And this can be incredibly unnerving for savers during times of economic volatility.

For some consumers, the prospect of falling markets can be overwhelming, and constantly they withdraw large portions (or all) of their pension pot to prevent the value from falling any further. The issue with this, is that it effectively removes the possibility of a recovery to pension pots when markets stabilise, and as such their pot will remain at a low value.

While savers are well within their right to withdraw their money at any time, it might not be in their best interests to do so. This is why it is absolutely vital to seek independent financial advice before making any major decision about retirement finances.

At My Pension Expert, our advisers have been urging the majority or our clients to take a step back, remain calm and wait for the markets to recover. Unless they desperately need the money, in which case we seek to find a method that eases cashflow issues, without causing any long-term financial damage.

No one could have predicted the events of 2020, or how it would impact people’s finances. So, when the unexpected occurs, the safest option is to avoid panic and seek independent financial advice.

Everyone will have different needs, and advisers understand this and are able to develop a tailored retirement finance strategies to suit each person’s specific requirements. Thus, savers will be able to develop a sustainable solution to short-term cash-flow issues, while protecting their long-term financial futures.