Defined contribution investors risk making serious mistakes with their hard-earned pension savings, especially those with poor access to advice, experts have warned.
Savers on the brink of retirement have witnessed significant falls in their pension funds due to the coronavirus crisis, but while those in defined benefit schemes can breathe more easily, experts have warned those who are part of DC schemes run the risk of making knee-jerk investment decisions that could irreparably damage their retirement dreams.
According to Simon Harrington, senior policy adviser – public policy – for the Personal Investment Management and Financial Advice Association, these savers are more likely to rush into cashing in their pension to avoid further potential market losses and shifting it into high-risk investments that offer appealing returns.
He said: “We are concerned that those who might have hoped to retire in the next couple of years might be tempted into rash investment choices or be taken in by suggestions that they might be able to recoup their losses more quickly in order to achieve their retirement dreams.
“There are bound to be a lot of anxious investors at present. Telling those feeling worried about their savings to keep calm and be patient may not be the most appealing message, but in most cases it remains the best course of action.”
Steve Webb, partner at consultancy LCP, agreed there was a real risk that DC investors in particular, because they bear the investment risk themselves, may be tempted to take the wrong action out of fear.
He said the clearest message he was hearing from investors was that they were worried about the risk of a fresh market downturn. Although locking in ‘turns paper losses into real ones’, he said there was a strong sense of ‘better the devil you know’ — “in other words, if they lock in now, at least they know what they’ve got and can plan with certainty rather than lie awake at night worrying about further falls”.
Mr Webb said: “Falling markets undoubtedly make investors nervous, especially where most of their retirement wealth is in DC pension arrangements.
“There is no doubt that some investors are frightened of further falls and may be looking to change their investments, either by moving into cash or by cashing out completely.”
According to Mr Webb, the biggest risk is that people conclude ‘mainstream’ investing has failed, and instead feel the need to try something exotic, which promises high yields at a time when their traditional investment is performing badly.
He said advisers should alert clients to the fact there are many rogue operators ready to prey on the unwary.
Mr Harrington agreed: “Pimfa is concerned about the prevalence of such scams, particularly in light of the losses many will have seen in their portfolios in the wake of the coronavirus pandemic.
“Financial scams are becoming more sophisticated and even relatively experienced investors can now be taken in by them.” This was one of the reasons Pimfa launched a financial scams initiative last week as part of its Financial and Mental Wellbeing campaign.
Don’t cash it in
Dr Anna Tilba from Durham University Business School has stated: “Coronavirus is creating favourable conditions for scammers who prey on vulnerable people and take advantage of panic, uncertainty and financial strain.”
With lockdown causing financial worries for many families, the Association of British Insurers has also been warning people not to view their pensions as a quick way of raising cash, and to think twice before making any rash financial decisions during this uncertain time.
Yvonne Braun, director of policy, long-term savings and protection for the Association of British Insurers, said: “There is concern that people could be tempted to use the pension freedoms to access their pensions at age 55, without thinking through the longer-term consequences, or falling prey to pension scammers out to rob savers of their pensions.”
She pointed to recent ABI research, which showed that if the average amount that was being withdrawn from pension pots continued at the same pace, many people risked running out of money in their retirement. Notably, the research was conducted prior to the arrival of Covid-19.
Retirement income is likely to have to last for decades: a man aged 55 can expect to live, on average, for a further 24 years; a woman at the same age can expect to live, on average, for a further 27 years.
Ms Braun added: “Lockdown will not last forever, but the decisions you make today about your pension could impact on your standard of living for years to come. Now, more than ever, it is important to think longer term, consider your options, and seek advice and guidance — whether from the Money and Pensions Service or a financial adviser — before making any decisions.”
How advisers can help clients fight scams
However, Mr Webb said he had not yet seen evidence of financial pressures leading people over 55 to raid their DB schemes. In his experience, he said in the “short term, this is quite the opposite. The tide may turn later in the year, but at the moment interest in DB transfers is below pre-pension freedoms levels”.
As reported by FTAdviser last month, the latest report from Action Fraud documented a 400 per cent increase in scams relating to coronavirus in March, with total losses reaching £970,000.
In addition to online shopping fraud, romance fraud, charity and lender fraud, some phishing emails related to investment schemes and pensions advice.
Earlier this month, The Pensions Regulator released a special Covid-19 update for pension fund trustees, urging trustees to be more vigilant about pension scams.
The Pensions Regulator is also launching new guidance to help employers freeze their DB obligations for three months to ease their financial burden in response to the economic fallout from Covid-19.
The value of advice has never been so clear, especially as evidence suggests the majority of people falling prey to scams are those without advisers, or those who act independently of any advice they may have received or had access to.
For those who do seek advice, Mr Webb encourages advisers to press their clients to be “transparent about their thinking, especially regarding any plans to move large sums of money out of mainstream investments”.
“A good dialogue now could save much heartache later,” he adds.
simoney.kyriakou@ft.com
