The current market volatility has spooked many retirees, who are worried about their pots and scrambling to find returns to cushion the impact of global lockdowns.
Auto-enrolment figures are at an all-time high, with research by Aegon showing around £98bn ($122bn, €109bn) being saved into pensions every year.
But with very low interest rates, and not much available in terms of returns, how can retirees be incentivised to save for their retirement?
International Adviser reached out to industry players to understand what options are currently available to investors.
Don’t be scared by market movements
Vince Smith-Hughes, director of specialist business support, at Prudential UK, said: “It’s important that despite the significant falls in markets – and partial recovery – individuals’ attitude to risks aren’t skewed by short-term movements.
“I’ve spoken to several advisers who have had cautious clients either wanting to move completely out of the markets into cash, or alternatively wanting to go all out into high-risk portfolios to catch the maximum upside.
“If the original attitude to risk was correct, then both of these things are probably not the right thing to do, unless circumstances have changed. For most people a well-diversified portfolio with a split of asset types and geographical locations remains the best option, at least for the majority of their investments,” he added.
Retirees that are currently taking money from the pensions need to be even wearier, Smith-Hughes warned.
“People who are already drawing an income need to be doubly cautious about where they are investing as taking income from the fund could well be crystallising any losses.”
But could putting money into a self-invested personal pension (Sipp) to access higher-risk investments help?
Smith-Hughes believes this to be a possibility, “though investment opportunities in low-cost Sipps or personal pensions are so wide now that they cater for many clients’ requirements”.
“If investors want to go into higher-risk investments, then they must do so with their eyes open – for example a high yield bond might seem attractive on face value – but obviously comes with a risk of default.”
Fraudsters have also taken advantage of the current situation to lure retirees in and con them out of their money.
“The risk of investment scams that are too good to be true are also, at the moment, very much to the fore, and something we all need to guard against. Bizarrely, as interest rates fall, often low–risk investors looking for a better return get sucked into these types of schemes, not realising they are moving from A to Z in terms of risk in one go.
“A move of one or two steps up the risk ladder would be a better starting place,” he recommended.
Many have already recovered
But what is happening to the markets is “nothing out of the ordinary” argues Tom Selby, senior analyst at AJ Bell.
He said: “Although some may have been spooked by the recent covid-19 downturn, it’s worth noting that in investment terms at least the impact has not been out of the ordinary compared to previous crises.
“Those who are decades from retirement should be able to ride out turbulence such as this and many in fact will now have recovered some or all of their pension value since March.
“Anyone taking an income in retirement may have been hit harder, particularly if they are in the early years of retirement and were taking large withdrawals just before the downturn hit.
“In this situation the investor may need to adjust their withdrawal plans in order to ensure their retirement income strategy remains sustainable.”
Both Selby and Smith-Hughes argue that people have ample incentives to save for retirement, but a lot needs to be done to raise awareness and educate them about what is available.
Selby added: “People have ample incentives to save for retirement, from generous upfront tax relief and death benefits to tax-free cash and total flexibility over how the money can be accessed from age 55.
“As an industry we need to get much better at explaining these incentives to people. Pensions have also historically suffered from an image problem, with various scandals from Robert Maxwell to Equitable Life tarnishing the brand for a generation of people.
“Such reputational damage is hard to overcome and often overshadows the huge benefits of retirement saving for millions of people.”
And Smith-Hughes believes that auto-enrolment has helped as well.
“It’s very encouraging to see that auto enrolment has had such an impact for employees,” he added.
“It wasn’t so long ago some people were predicting mass opt outs, and fortunately that’s not happened. However, the next step is to find ways to show people that often more needs to be saved to give them the retirement they want.”
Education on tax relief
What retirees should be more aware about are the reliefs that are in place for contributing into a pension.
Smith–Hughes continued: “The current benefits of tax relief are significant and should not be ignored. However, perhaps we should find other ways to express it.
“Tax relief as a statement won’t mean much to some, but for example, I’ve also seen it expressed as ‘for every £100 ($124, €110) saved, £25 is added to your pot by the government’. This seems to resonate a little more.
“Add in the advantages of tax–free cash and the potential to pass the wealth down the generations inheritance tax (IHT)-free and you have, what I believe, is an unbeatable investment for most.
“Another consideration that should not be overlooked is the ability to recoup some or even all investment losses with the tax relief that is available.
“Let’s not forget some higher earners will now be effectively outside of the tapered annual allowance rules, so will be able to pay in £40,000 this year, when they previously could have been capped at £10,000.”
Make access equal
But if there is one thing that can be attributed to auto-enrolment, is breaching the participation gap, Ian Browne, retirement expert at Quilter, argues.
“The success of automatic enrolment in boosting pension participation must serve as a reminder of the need to extend the policy to incorporate other types of workers, such as the self-employed, who fall outside of the scope of automatic enrolment and are falling behind when it comes to retirement savings.”
The impact of the coronavirus outbreak has not helped, however, and the low engagement rates among certain groups is something the Department for Work and Pensions (DWP) should look at in the future, “especially after many self-employed workers have suffered a financial shock thanks to Covid-19 and fall outside the scope of government support schemes.”