Advisers have a key role to play when it comes to ensuring their clients understand the impact of inflation on their money, according to The Pension Regulator’s executive director of policy, analysis and advice David Fairs.
Speaking at FTAdviser’s Later Life Summit today (May 19), Fairs said individuals have been accessing their retirement savings and then depositing the money in the bank.
“That's not necessarily good in a period of low inflation, but actually with the sort of levels of inflation that we've got at the moment, the 9 per cent per annum inflation quickly erodes the value of those retirement savings,” he said.
“We have to get across that it's not about keeping the quantum of money that you've got safe, it’s actually about protecting it from inflation too.”
As people are beginning to live longer, they have a longer period in retirement and Fairs explained that people need to think about staying in growth assets for longer into the early part of their retirement.
“Investment pathways are really important in getting people to understand the impact and the erosion of value that inflation has on savings is absolutely crucial,” he added. “I think advisers have got a critical role to play in that.”
A poll from Interactive Investor earlier this month found more than a third (36 per cent) of consumers believed the cost of living crisis will stop them from hitting financial milestones.
It found that the crisis was the second biggest threat to personal finances among the sample, cited by almost a third (30 per cent) of respondents, behind a stock market crash (50 per cent), with a recession ranking third (10 per cent).
Due to this crisis, many individuals may opt out of auto-enrolment as they need to use the cash now.
Fairs said: “It is really important that if people can, that they keep going, they keep saving and they try to put that money to one side, but equally if people are struggling to pay their bills, it's quite hard to say to somebody that it's important to continue retirement savings if you haven't got enough money to put food on the table for your children.
“There are some really tough choices and we've got to encourage people to keep saving if at all they can.”
Fraud and scams
As the high cost of living and financial pressures take over, scammers are more inclined to take advantage and prey on people.
In November, rules came into force which removed people's statutory right to transfer in suspected scam cases, giving trustees the right to block transfers if certain ‘red flags’ are present, such as individuals being pressured to transfer, or if they have questions around the receiving scheme.
In addition, they can raise an ‘amber flag’ if they suspect a potential scam, which will mean the member will have to provide evidence they have taken specific scam guidance from the Money and Pensions Service before they are allowed to transfer.
However, some advisers have contested that the DWP and TPR rules have created some confusion about what to follow.
Fairs said: “It is confusing, clearly what the regulations were trying to catch is those sort of wine ventures in Cape Verde and the sort of unregulated unlisted investments that have been typically in use in terms of scams.
“They weren't looking to capture the quoted investments from a reputable provider."
He urged that it was important to understand how scammers operate and what can be done to protect them.
“We've got new rules come into play with amber flags and red flags and it would be fair to say I think that we're still seeing the industry settled down on how to operate that.
“We're seeing some different interpretations of how to apply them and we know in The Pensions Regulator and in DWP, there are some challenges about how people are looking at the requirements on overseas investments.”
Fairs added: “We are in the early days of things settling down. People are interpreting them in different ways, but I think we will get there and people will share what they're doing.
“We're also looking at some of the incentives that are happening in the marketplace to try and encourage people to go to certain providers, so there are those things that are going on.”
sonia.rach@ft.com
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