2021 UK pension health assessment: The state of the UK’s retirement finances

COVID-19 and historically low interest rates have created the perfect storm for UK savers.

Firstly, the pandemic jeopardised the job security of millions of Britons. Indeed, within the final three months of 2020, the UK’s unemployment rate sat at 5.1% – an increase of 1.3% on a year before. Of course, without a regular income, any household finances will have been stretched to the limit.

Adding to such pressure is the fact that interest rates have remained at historic lows of 0.1% for over a year. Not only does this mean that those with money in traditional savings accounts risk their money-losing value over time, but it also impacts various retirement strategies. Our executive chairman, Andrew Megson, has discussed at length in the likes of the Daily Express, how they may hinder those whose retirement strategy depends on taking out an annuity or on the affordability of defined benefit pension schemes.

Under such circumstances, one would expect people to be readily revising their retirement strategies, or at the very least, checking up on their pension pot to understand how much they have saved. Yet this has not been the case.

So, My Pension Expert commissioned the first UK Pension Health Assessment – a survey of over 1,200 UK adults aged 40 and over – to understand why…

Lack of engagement

The most startling of My Pension Expert’s findings was the fact that almost half (46%) of adults over the age of 40 had not checked the amount they had saved into their pension pot within the twelve months leading up to May 2021.

What’s more, an overwhelming majority (78%) did not undertake a detailed review of their retirement strategy during the same period of time, whilst just 14% of pre-retirees consulted an independent financial adviser about their retirement strategy.

Evidently, pension engagement amongst Britons is worryingly low. And this is not solely down to short-term financial concerns prompted by the coronavirus pandemic. After all, a recent study by Citizen’s Advice found that almost one in five (19%) Britons claim not to be interested in the value of their pension pot, whilst 15% claim that they simply do not want to think about their pension.

To a point, this is understandable. Many people hate the thought of getting old, and a pension essentially acknowledges that one day, we will all get old. However, sticking one’s head in the sand will only cause more damage later down the line.

Long-term issues

Failing to check in regularly with one’s pension could mean that people don’t understand how ineffective their savings strategy is before it’s too late. And this can cause savers to panic.

Panic can drive people to make rash and ill-advised financial decisions. For example, once someone approaching retirement age realises that they do not have enough money to support them when they retire, they may decide to move their savings into higher-risk investments in an attempt to rapidly achieve a strong return on their pension investments – as almost one in ten (9%) of respondents to My Pension Expert’s research discovered.

Of course, high-risk investments have the potential to generate strong returns – but this is not guaranteed. Worst case scenario, they could result in heavy losses, putting the individual in a worse financial situation than before.

Increasing engagement

Evidently, something must be done to enhance pension engagement. However, it is not the responsibility of one party alone to achieve this. It will take a more holistic effort from the financial services industry in general – from advisers and life companies to the Financial Conduct Authority (FCA) themselves.

The key element will be ensuring that savers have access to their pension pot so they can easily check in on their savings on a regular basis. Arguably, the Government’s pension dashboard will be a positive step forward in this regard.

However, whilst the dashboard is being developed, advisers and other stakeholders within the financial services sector should work to improve Britons’ access to independent financial advice, as well as introductory information about the benefits of early retirement planning.

Of course, consumer behaviours will not change overnight – over 40s are unlikely to suddenly start monitoring their pension pot on a monthly basis. However, improving people’s access to information, advice, and indeed their own pension pot, will certainly encourage a gradual increase in pension engagement. And doing so will ensure that more people will be able to achieve the financially comfortable retirement they deserve.