Savers seek cash in cost of living crisis

Pension savers are temporarily halting pension contributions to cope with the cost of living crisis, a retirement expert has warned.

Steven Leigh, associate partner at Aon, said its latest research has found that one in five defined contribution (DC) schemes have recorded an increase in people opting out or stopping contributions temporarily, and 15 per cent are now choosing to access their retirement savings early.

He said that this has been caused by the cost of living crisis and turmoil in investment markets at the end of last year.

Speaking at a recent Aon webinar entitled ‘Helping DC Savers to Make Better Choices’, he said: “We are seeing that the cost of living challenges are starting to bleed through and individuals are tapping into pension savings - either stopping savings or taking money out early to alleviate some of those pressures. 

“With younger savers it is not good if they opt out and stop savings, but hopefully we can get them back in and start saving again and make up for some of those losses. But for people coming up to retirement and in particular with the falls in gilts prices and fixed income investments at the back of last year which haven’t really recovered into this year, that’s an area where a lot of default funds start to move people’s investments as they get closer to retirement. So, people coming up to retirement might see a big drop in their DC savings – 20% or so. And if they are not careful, they could lock in that loss if they make the wrong choice at retirement and take all their money out as cash.”

However, he said pension schemes are aware of people’s plight and are taking steps to help them make better decisions. 

Leigh said: “We are seeing schemes thinking about this and trying to work out what to do to help. That includes working with financial advisers and putting in education and support to try and help people make better decisions as they come up to retirement.” 

Seeking help

The September webinar discussed how trustees can better support DC savers reaching retirement and the areas in which individuals typically need most support.

Martin Banerjee, chartered financial planner from Origen, said the cost of living crisis has also led to a shift in the behaviour of savers, with some delaying their retirement date. 

He said: “We are finding that people are revisiting their objectives. ‘Can I retire? Can I have the lifestyle I want?’ Those questions are often not the most positive to face but it’s really important to understand your position, because once you understand your position, the answer might be that even with the impact of some of the external factors that we can do nothing about, you can still have the retirement you want … In some cases, perhaps the answer is to defer retirement or look towards alternatives. So not just having a pension, but downsizing the house or using cash for a period to allow investments to repair themselves.” 

However, Dianne Day, professional trustee from Independent Governance Group, said it is important people do not make rash decisions and reminded savers that if they delay their retirement then that may impact the investment mix of their pension fund.

She said: “One of the issues we discuss is avoiding making rash decisions. If you do want to defer your retirement, a lot of members are encouraged to go into their online portals and move their selected retirement age out. If you’re 60 and the scheme is set at 65 and you think it’s actually going to be more like 68, then if you move that, you’ve got to understand that in a default that could change your investment mix. In the typical glide path, you are pushing yourself up back up the investment gradient.”

Banerjee said the cost of living crisis highlights the importance of advice and added that employers must create a framework to enable staff to access advice at a reduced cost. 

He said: “In an ideal world, every member at retirement would receive advice. The barrier to that is cost and we appreciate that. But where we see it work really well is when the employer creates a framework, where it either accepts some of the cost or passes that cost on to the member. But at least they are creating the framework in a safe pair of hands. Often when done like that, the cost can be quite efficient, and members can end up not paying what the market average would dictate.”

The power of human interaction

The webinar also discussed how tools and calculators can help savers boost their retirement pots.

Banerjee said: “If you’ve got a long way to retirement, you might think ‘crikey I can’t achieve this,’ but you need to appreciate it is a journey, and tools really help bring that to life. In the advice world, we take this a step further with cash flow analysis, which is a much more complex tool. You can almost simulate to the penny your retirement and all the bumps along the way. 

“Tools are a great starting point and allow people to know they are tracking on the right line. But a tool can only take things so far. A human being then needs to come in and help them understand it all.”