Pensions  

Hurdles faced by later-life savers

This article is part of
How to start a pension if you've left it late

  • Comfortable investing in cash Isas (83 per cent) and National Savings & Investments savings accounts (74 per cent).
  • They were less comfortable in putting their money into investment trusts or funds (39 per cent) or stocks and shares (40 per cent).
  • 77 per cent are not currently taking financial advice.
  • 44 per cent said they didn't have enough knowledge to make the best financial decisions.

Again, this poses a challenge to people who know they ought to be saving more to help themselves in retirement, but do not want to take any investment risk.

With the Bank of England base rate still at 0.5 per cent for the ninth year running, and inflation of 2.3 to 2.4 per cent far outstripping returns on cash accounts and many high street cash Isas, those being too cautious with their savings will end up seeing the spending power of what they have put away eroded by inflation. 

If they were to put this into a pension scheme - whether into a workplace scheme or not - and invest in a diversified portfolio that included some investment risk, they would benefit from some measure of compound returns over a period of 10 to 15 years.

This would produce a far better pension pot than squirreling money into a high street cash Isa. 

Vince Smith-Hughes, retirement expert for Prudential, says although there is the potential for market risk and sequencing risk, people should be looking at a diversified portfolio.

He explains: "A diversified fund that invests in equities both in the UK and overseas, property, fixed interest and other asset classes, effectively does the job for investors."

Justin Urquhart Stewart, co-founder of Seven Investment Management, states: "While investment risk might not be for everyone, and we all know that stellar stock markets gains can easily be reversed, too much caution can actually cost as inflation has outstripped cash returns – something many people are worrying about themselves.

"Longevity means they need their retirement savings to stretch further than any generation before them – over 20 years for today’s 65-year-olds, on average. The findings show that the financial situation for a large number of over-50s is far more precarious than was previously recognised.”

His point is that even if one does intend to retire at 65, this does not mean the pot needs to be automatically converted into cash or cash-like securities at the point of retirement.

The need to save for longer

The logic of longevity dictates that a pension pot - or at least a portion of it - may have to remain invested for longer.

Referring to research carried out by Seven Investment Management in 2017, his colleague Matthew Yeates, investment manager, explains: "An investor’s time horizon is often used to temper their investment risk.

"With life expectancy on the up, many of them will be invested for much longer then they may have planned and so the point of retirement is not the point to stop investing for growth."