Will Anxiety Leave You In The Lurch?
13th September 2017 Justin Urquhart Stewart, Co-Founder 7IM
Looking at the challenges around selecting a pension, pension reforms and planning for the long term and future retirement.
Two years has now flown by since the then Chancellor of the Exchequer, George Osborne, announced that people would no longer be forced to buy an annuity with their pension money. And I viewed this as great news given I’m someone who believes that you should remain invested over the long term and throughout retirement.
But what was then music to my ears has now started to sound a little out of tune – and that’s because of people’s response to the pension freedoms.
Figures published by HMRC in July show that 200,000 people accessed £1.86 billion from their pensions in the period between April and June 2017 alone. And those numbers have been steadily increasing – in the second quarter of 2016, the numbers were 159,000 and £1.77 billion respectively.
However, precisely why I’m concerned that the new pension rules are not working as well they could be was highlighted in research also released in July, but this time from the financial services industry regulator, the Financial Conduct Authority (FCA). These highlight three issues that are encouraging people to withdraw their money early, which I’d like to try to address.
1 - Lack of accessibility
According to the FCA findings, people feel their pension savings are not easily accessed when they’re held within a specific pension account. I’m hoping that this is a hangover from not being unable to get at any of their money until they’re 55.
So, as soon as people can get their hands on it, they do. But while the Government’s changes to the state pension age may also affect the age at which people can access private pensions, they haven’t yet happened. And if you are already 55 or older, your right to access is not going to change. So, if you don’t need the money, do make sure you understand the consequences of taking it – for example that you’ll immediately lose out on the power of compounding.
2 - Trust in the industry
People apparently fear that their pension money is at risk. Although this lack of trust was not down to personal experience, the hyperbole of the news headlines has caused concern. And this encourages many to believe it’s simply safer to withdraw their money as soon as possible and put it in the bank on the grounds that it could then benefit from the deposit guarantee scheme.
Of course, the value of investments can go down at any point in time as well as up, but there are also losses attached to banking your cash savings. Interest rates remain at 200-year lows and many believe that rates won’t rise anytime soon. Meanwhile inflation stands at 2.6%. So you’re actually losing money over time at 2.35% per annum – hardly the type of steady returns that anyone wants to see.
3 - Low expectations on longevity
Despite all the news headlines in the press that one in ten of us should expect to live to be over 100, those interviewed believed that would ‘only’ live to around 80 to 85.
As a result, they are seriously under calculating the amount of money that they’ll probably need for their retirement. This particularly becomes a problem when it’s coupled with the view that many cited when they stated that they saw their pension money as a ‘windfall’. This means it’s likely to be spent on cars, holidays or home improvements. Because there was the option to take money out, many saw that decision as the obvious one regardless of whether they needed the money or not.
So while I do not relish being a doom monger, I really do hope people take a long hard look at their potential longevity and plan accordingly.
So, if you’re thinking about accessing your pension savings, please think twice – really looking into why you think you need the cash. See if you can speak to a professional adviser before making a decision – while there are costs attached to that, it really can be false economy to not do so. All just common sense really…
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