Pension Panic: What Is It and How Can You Avoid It?
Anxiety surrounding pensions is at a high, as the COVID-19 pandemic has upset stocks and interest rates the world over. But that does not mean there is cause to panic.
Andrew Megson, Executive Chairman of My Pension Expert, discusses how one can best safeguard their pension in a time of crisis.
Pension panic: it is a common occurrence as people approach retirement. However, the onset of the coronavirus pandemic has created a new surge of it rippling throughout Britain.
As of mid-June, more than one in four UK workers had been furloughed, while over 2.6 million self-employed people had applied for financial support from the Government. Worse still, unemployment is set to reach 3.5 million by the end of 2020, according to British business executives.
These startling statistics illustrate just how many people’s livelihoods have been affected by the pandemic. The crisis has brought about financial hardship for millions, which in turn has resulted in a significant increase in consumer demand for financial advice, credit and support.
For many people, their pension pot has taken on added importance. Whether seeking access to these funds in the short-term or re-evaluating their long-term strategy, pensions have been put under the spotlight.
What is pension panic?
You might have seen or heard the term pension panic over recent weeks, but what does it mean?
Well, firstly, it is important to note that pension panic is not a new phenomenon brought about by COVID-19. It essentially refers to people who get closer to retirement age and realise – or feel – that they are not financially prepared. They worry if they have enough money to retire comfortably, if their pension pot is “working hard enough” for them, and how (and when) can they access their cash.
Yet there can be no denying that these important questions have become more prominent as a result of the pandemic – sudden changes in people’s financial circumstances has understandably resulted in a palpable sense of pension panic among an increasing number of consumers. This in turn can lead to potentially rash, ill-advised decisions.
Watching out for pension scammers
Sadly, pension scammers have also been seeking to capitalise on this panic.
Most consumers think they are savvy enough to spot a scam; however, if they are swept up in a pension panic, it can be easy to overlook the red flags. Indeed, research carried out by Action Fraud revealed that there were more than 2,100 case of fraud in the first five months of 2020, with losses resulting from fraudulent activity amounting to £5.14 million.
Pension scammers will come in many shapes and sizes. Some claim to offer “free pension reviews”, always concluding that victims’ pension pots could offer higher returns if placed in unusual investments such as biofuels, forestry or storage units. Others promise consumers an instant injection of cash by falsely telling them they can access their funds before the age of 55 (early pension withdrawal could result in a tax bill of 55%). There remain many, too, who simply try their luck by illegally cold-calling potential victims in a bid to get their hands on people’s hard-earned savings.
Pension savers must remember that if they have any suspicions about the legitimacy of a website or business then they can search the company on the Financial Conduct Authority’s (FCA) Financial Services Register. If they are not on the register, then it is likely a scam.
Combatting pension panic
So, putting scammers to one side, how can one avoid being overcome by pension panic and making ill-fated financial decisions? In short, people must seek advice. Independent, considered, tailored advice from a trained individual or a reputable company.
The FCA strongly recommends seeking financial advice if an individual wants to cash-in a pension worth more than £30,000. But this does not mean those wanting to cash-in a smaller sum should overlook advice.
Why would people be reluctant to seek advice? Some consumers might think advice is unnecessary – that they can devise their own pension strategy without consulting anyone else. Others will simply have been enrolled on their employer’s pension scheme and given it little further thought. And a sizeable proportion of consumers rule out pension advice because they believe it would be too expensive.
The FCA strongly recommends seeking financial advice if an individual wants to cash-in a pension worth more than £30,000.
This is untrue. In fact, this is a dangerous mindset that must be avoided. Pension advice is necessary for all, and it does not come with a prohibitively large price tag. The question really is whether you can afford not to get pension advice.
Everyone needs pension advice
It may seem like an obvious point, but there is no one-size-fits-all model for retirement finance. While some consumers may know the basics, they might not understand how to maximise their pension pots to achieve a more comfortable retirement.
People may assume the most logical option for them is to leave their pension pot as long as possible and watch its value increase over the years. However, this might not be the best route for them and could cause them to lose out financially.
There is a plethora of options available. Annuities, for example, are a retirement income product that is bought with a pension pot; they could offer retirees peace of mind by providing fixed monthly income for the rest of their lives (or for a specified period agreed with the annuities lender). Alternatively, flexible drawdowns could provide over-55s with the freedom to choose an income to withdraw from their pension which suits their exact circumstances.
The right option always comes downs to individual circumstances. And this further underlines the benefit of financial advisors who review all the possible options and explain them to consumers in simple, jargon-free terms. Only then can a well-informed decision be made.
Knowledge is power, or so the old cliché goes. This rings true in the world of pensions – panic often stems from a lack of knowledge about your pension and the options available. Speaking with experts and gaining their advice gives consumers knowledge and, in turn, power. This will help fight off pension panic and ultimately ensure the best possible outcome for one’s retirement.