Andrew Megson of My Pension Expert talks to workingwise.co.uk about everything from the impact of the cost of living crisis on pensions to the need for better education about pensions.
For National Pension Awareness Week, we asked Andrew Megson for My Pension Expert for his views on everything from pensions education and the impact of the cost of living crisis on pensions to pension drawdown.
workingwise.co.uk: Pension experts advise that it is important to engage with your pension. Why is this and what can be done to encourage more engagement and greater understanding about your policy/policies? workingwise.co.uk’s research shows many people just don’t understand the information they receive.
Andrew Megson: There are several reasons as to why so many people do not, or cannot, engage with their pension. Firstly, when most people start a new job, they are signed up to a workplace pension which they contribute to throughout their career. These contributions are taken from a monthly salary before it hits the employees’ accounts; it’s an automatic process, so it’s easy not to give much thought to. A further barrier to engagement is the fact that locating one’s pensions pots, monitoring how much is them and moving savings and investments are all complicated. The delays in the government’s long-awaited government dashboard programme – which is designed to give people online access to all their pension information in one place – is a big blow in this regard.
These are serious issues, which could cause major financial problems for Britons later down the line. For instance, it can lead to issues such as lost pensions. As previously stated, most people move jobs several times throughout their careers, for example, millennials on average are changing jobs every two to three years. Consequently, people lose track of the pension pots they accumulate. Shockingly, it is predicted that £20 billion worth of pensions are currently sitting unclaimed because people simply forgotten they had them.
As one might anticipate, it is less likely that someone will lose sight of their pension pots if they consistently engage with their pension strategy. Regularly checking in with their pension will allow them to understand exactly how much they have saved so far, and the steps they must take to achieve their retirement goals.
As such, education around pensions is vital. Employers and the government should work together to ensure employees are empowered with financial education. A good place to start is to help clients understand the additional income they can accrue (or miss out on) through regular contributions or the advantages of tax relief on pensions. Indeed, employers, the pensions sector and the government must work together to ensure pension information is displayed in a clear, jargon-free manner.
Furthermore, they must embrace technology that helps to make pension information easily accessible. This includes creating customer-friendly online platforms and ensuring consumers know how to locate them, while also informing consumers where to go to find affordable so they can receive clear explanations regarding their pension information and assistance with developing their pension strategy.
ww: How has the cost-of-living crisis affected pensions? Are people scaling back on their contributions? What could this mean in the longer term?
AM: In short, inflation and rising costs are eroding the relative value of people’s savings. For retirees, the tens of thousands of pounds they have tucked away simply will not stretch as far as they had imagined – for some, it will not cover the bare essentials.
Furthermore, the current economic climate is placing a great deal of pressure on individuals and households. This might cause some people to feel that they must pause their pension contributions and prioritise more immediate financial commitments, such as energy bills.
Consequently, confidence in future finances seems to be at an all-time low. A recent My Pension Expert poll found that 37% of UK workers aged 40 and above feel the cost-of-living crisis has made retirement impossible for the foreseeable future. Whilst we are experiencing extremely challenging financial circumstances, pausing pension contributions can have a significant impact on our financial security in retirement. Making sudden reactive decisions in response to sudden economic volatility could be problematic as it could leave people worse off in the future. A potential option would be to review existing savings and seek help from an adviser. They will be able to make recommendations to maintain control of present finances, whilst limiting potential risk to their future finances. This could mean adjusting one’s finances in a way that still enables a savers to contribute into their pension pot, therefore, still receiving the various benefits savers will enjoy, from employer contributions to pension tax relief.
The state of the economy today is unsettling. Britons who are approaching retirement should keep in mind that there are possibilities; the key will be to maintain composure and seek advice. By doing this, individuals will be able to adjust their strategy without hindering their existing financial situation whilst achieving their desired retirement outcome.
ww: Has the ability to draw down your pension from your 50s led to more people opting for early retirement? Are you worried about this, given people may have taken these decisions before the current cost-of-living crisis and now find themselves struggling?
AM: This will vary on a case-by-case basis: everyone has a different financial situation and lifestyle expectations for retirement – there is no single product that works for all. A product that provides the flexibility to choose exactly how much money a saver wants to withdraw from their pension at any given time will be better suited for some people than a more rigged product such as annuities; other will prefer the more structured way of receiving a retirement income. Of course, current market fluctuations and the cost-of-living crisis have impacted growth potential.
So, it’s important that retirees remain calm and assess their options. This could mean adding more higher-risk investments to their strategy to combat the effects of inflation or delaying retirement, opting instead for a partial winding down through part-time work before full retirement.
A primary concern is that many are not seeking advice before taking action. Recent FCA data revealed there was a 21% increase in people not taking advice when entering into a drawdown. Furthermore, the data highlights that some people are now reaching into their pension pot to make ends meet during the cost-of-living crisis.
Accordingly, It’s vital that savers first speak to an independent financial adviser who can assist in deciding the best action to take, instead of making any rash decisions than can damage their retirement finances further down the line.
ww: When should education about pensions begin?
AM: It’s important that young people are made aware from an early age of the true cost of retiring. Discussions around money can sometimes feel unnecessary when concerns such as retirement are decades away. Nonetheless, these discussions are necessary to ensure young people understand the impact of saving for their future – particularly as the cost of retirement becomes more expensive.
Given the lack of financial education at schools and universities, parents must utilise available resources to equip children with the knowledge they’ll need to manage their money effectively and help them develop planning skills for later in life. Employers must take this forward, discussing pensions openly with all staff, not just older members of the workforce. The earlier planning begins, the better chance of someone achieving the retirement outcomes they want.
ww: What do you think puts people off seeking expert advice? How can this be addressed?
AM: There are certainly some notable misconceptions that put some people off speaking to an independent financial adviser. This can include the perceived cost, complexity and use of financial jargon, fear of pushy salespeople, the belief it is only for the wealthy or an over reliance on online advice instead.
These views are understandable in many instances. Financial advice has not always been easily accessible to the entire UK population, and not enough is done to education pension planners as to the value of advice or how it works.
Addressing this will involve making people aware of the true value of tailored financial advice for all, regardless of their wealth bracket. Advisers conduct a thorough assessment of an individual’s existing financial situation, as well as their retirement goals, to determine the best route to retirement. For instance, this might involve incorporating higher-risk investments into their strategy; for others, a lower-risk strategy might be more suitable.
The recent development of tech-based solutions that further facilitate the accessibility of advice and engagement in retirement strategies could provide a solution to this issue. This could help the financial services industry to become more accessible is and affordability while helping people within all wealth brackets achieve the retirement outcomes they deserve.