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.