What does Justin think about pension freedoms: you shouldn’t let fear ruin your retirement.
I remember it well – the day George Osborne announced that people would no longer be forced to buy an annuity with their pension savings. As someone who has long believed in the need to stay invested over the long term for retirement, it was music to my ears. But as time has progressed, and more and more people are making use of the new pension freedoms, I’m starting to feel slightly uncomfortable.
Figures published by HM Revenue & Customs (HMRC) earlier this year show that 162,000 people accessed £1.56 billion of pension savings in the last three months of 2016 alone.1 Yet according to a study by a fellow fund management house2, 41% of those who have accessed their pension savings simply moved the money into their current account and just left it there. With the average pension withdrawal standing at £9,000,3 we can surmise that nearly £600mn was put into cash accounts in those three months.
So this is why I’m concerned that the new pension rules are not working as well they could be. Why would people choose to take their money out of a pension and then park it in a bank account, where it is effectively losing money (thanks to rising inflation and near 200-year low interest rates)? They’re definitely not getting the stable return that investors should! I think there are three common misconceptions at play here: concerns about getting at your money, the investment risks and the attendant costs.
- Lack of accessibility
People feel their pension savings are not accessible when held within a specific pension investment. Perhaps this is a hangover from the fact that they can’t access their money until they’re 55 and so as soon as they can get their hands on it, they move it before someone changes their mind? Given noises by the Government that the changing state pension age may affect private pension ages too, it is a distinct possibility. The reality is that form the age of 55 you can access your pension savings as often as you like. So, if you don’t need the money, make sure you understand the risks but don’t withdraw it for the wrong reasons– not least as you’re losing out on the powerful prop of compounding.
- Investment risk
People may fear that their money is at risk within their pension investment accounts, believing it is safer to withdraw it as soon as possible and benefit from the deposit guarantee scheme. Of course, the value of all investments are at risk of going down at any point in time, but there are also risks when you’re holding savings in cash. Low interest rates, rising inflation, loss of compounding returns and increased longevity are, in my opinion, much much bigger risks facing retirees today.
Investment funds used to carry high charges, and older savers felt uncomfortable with that cost. However, these days investment managers, such as 7IM, offering transparent and fair fee structures that don’t cost the earth and won’t dramatically eat into your returns. And for all those who think doing it themselves will save on fees, a study by the Investment Association in 2016 estimated that DIY investors pay an average of seven times the cost of those that turn to professionals.
These three misconceptions, combined with confusion around the new pension freedom rules, make me increasingly worried that too many people are not thinking through their retirement planning properly, procrastinating about what to do next. It’s costing them money at a time when they can ill afford to squander their hard-earned savings.
So, if you’re thinking about accessing your pension savings, please think twice and speak to a professional adviser before making a decision. And, if you have substantial savings in cash, then you should do the same.
Justin Urquhart Stewart
Co Founder and Head of Corporate Development
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