Protecting your pension pot, post-COVID 19

Andrew Megson, executive chairman, My Pension Expert, discusses the financial pressures brought about by the coronavirus, and how consumers can plan for retirement and protect their pension pot in such uncertain times

After months of nationally enforced lockdown shuttering businesses across the country and making consumers to stay at home, it is no surprise that the outbreak of COVID-19 has upended the economy.

Indeed, the coronavirus has shaken household finances in the UK, with many consumers seeing their income reduced as a result of being furloughed or made redundant. Adding to the pressures, the Bank of England announced that base rates would remain historic lows of 0.1%.

Finally, on 12^th of August it was formally announced that the UK has entered into a recession, with GDP falling by 2.2% between January and March. Whilst this news was not unexpected, it will have dealt an inevitable blow to personal finances.

Faced with more uncertainty and hard times ahead, it is challenging for consumers to plan for the future – particularly when considering their retirement options. And for some, this might lead to panic.

What drives pension panic?

Undoubtedly, one of the main causes of pension panic is a lack of understanding about retirement finances. Indeed, new research conducted by My Pension Expert has uncovered that almost a third (32%) of UK adults don’t understand how their pension works, or even where it is being held.

This confusion is only compounded by the current economic uncertainty. Considering the challenges that the pandemic has presented to the job market, many consumers have been subject to sudden changes in their employment. Unfortunately, almost one in ten (9%) of consumers aged 40 to 67 have been pushed into early retirement since March 2020. Worse still, over two fifths (42%) of consumers in this age bracket do now not have a retirement plan, as they were putting it off until a later date.

Economic instability and a general lack of knowledge about their pension can create a whirlwind of panic amongst consumers. Consequently, we see many people nearing retirement age making rash and miscalculated decisions, which could be detrimental to their financial future.

Understanding your pension pot

The main driver of fear amongst many consumers approaching retirement age is that their pension investments have not gained sufficient value through investments. And with UK markets dropping, many savers will be concerned about the diminishing value of their pot. Worryingly, this has driven one in eight (12%) of Britons to move their pension pot into a high-risk investment in an attempt to increase its value, according to My Pension Expert.

Elsewhere, consumers have attempted to tackle their financial issues by withdrawing money from their pension without seeking independent financial advice; as has been the case for 6% of people aged 40-67. However, without a clear retirement strategy or adequate guidance, they run the risk of their pension pot drying up completely, without them even realising it.

Protecting your pension pot

It is understandable that consumers might panic about the value of their investment, given the vast economic fallout of COVID-19, however, it is important that savers keep a cool head and consider alternative routes.

One option for worried consumers might be to temporarily pause pension withdrawals. It is usually possible to keep a few years’ worth of cash separate from your investment in most drawdown schemes. This means that customers have funds available for a rainy day and thus preventing them from panicking and withdrawing too much from their retirement fund. This allows the value of their pot to stabilise as the market eventually settles.

Others might prefer to switch from a fixed sum to a fixed percentage withdrawals instead. This means that instead of taking out fixed sums, which inevitably results in draining your pension pot at a faster rate, consumers will only withdraw a percentage of what remains in their pot. Although savers might see their income decrease for a short period of time, fixed percentage withdrawals ensure that retirement savings will last longer.

Looking to alternative options

Pension planners should also remember that if these retirement income options don’t suit them, there are other options available.

For example, some consumers may consider purchasing an annuity – a product which guarantees retirees a fixed monthly income for the rest of their lives, or for a set period of time agreed with their provider – with part or all of their pension pot. For those who prefer the security of a guaranteed income, without having to worry about keeping up with pension investments, this can be a good option.

Another alternative for those looking to access some extra funds is equity release. These products enable homeowners over the age of 55 to access any cash that is tied up to their primary property. This can come in the form of a lifetime mortgage, when a consumer takes out a mortgage on their house while still maintaining ownership; or a home reversion, whereby savers can sell all or part of their property to a reversion provider in return for a lump sum or regular payments. 

Seeking financial advice

Of course, these options might not suit everyone. It is important that retirees know that that they do not have to navigate the difficulties of retirement finances alone. Independent financial advisers can offer a helping hand when it comes to making the decision that’s best for you and can help to demystify complicated finance options.

Additionally, seeking FCA-regulated financial advice ensures an additional level of customer safety. Put simply, if a consumer decides to follow any advice offered by an adviser and ends up worse off, the adviser in question must reinstate their original financial position. This allows more tentative retirees to explore the option that is best for them, without being preoccupied with potential risks.

Although the current economic landscape has complicated the retirement process for many, it is vital that savers seek sound advice before rushing into any impulsive decisions. By looking to an independent financial adviser for assistance, savers will be able to weather the economic storm, develop a sustainable retirement strategy and, most importantly, protect their hard-saved cash.