Retirement Money News

Studies released this week show the increasing pressures faced by those saving for retirement. Rising care costs are reducing inheritances that many were planning to use towards their own retirement savings, while Covid-19 is stretching people between saving into an emergency fund for today or saving for the longer-term. Those living in the south have a more diverse range of sources to fund their pensions compared to those in the midlands and north, potentially reducing the resilience of their pension savings should their main income source fall.
Those wanting to find the best way to save for retirement are grappling with a potentially volatile stock market, as the economic shock of the Coronavirus pandemic continues, alongside the lowest savings rates in history. Despite concerns about the performance of the stock market, results from the Office of National Statistics (ONS) Wealth and Assets Survey show that the majority (57%) of people still believe workplace and personal pensions to be the safest home for their retirement funds, followed by a quarter of people that see property as their safest place for retirement saving.
The expectation of what would add the most value to their pension savings was significantly higher for property compared to a workplace or personal pension. More than two-fifths (43%) of people believed property would make the most of their money compared to 33% for personal and workplace pensions. A greater proportion of people in the East of England placed their confidence in property, with 53% stating this as the best-performing option.
Even though savings accounts and ISAs have Government protection from the Financial Services Compensation Scheme (FSCS), only 10% thought these would be the safest place for their retirement savings and only 11% expected them to generate the greatest value.
Investing in property may be even more appealing now due to the stamp duty holiday, which could save buyers thousands when looking at acquiring properties for buy-to-let. However, those in workplace schemes should remember that they will also benefit from their employer making contributions into their pension pot and sometimes the more the employee contributes, the more the employer will add as well.

Workers saving into a pension will be pleased to see that during April to June (Q2) 2020, pension fund performance improved significantly compared to the first three months of 2020.
Data from the latest Moneyfacts UK Personal Pension Trends Treasury Report shows that in Q2 2020, the average pension fund returned to 13.3%, its best quarterly performance since July to September (Q3) 2009. This compares with January to March (Q1) 2020, when pension funds suffered their worst quarterly performance on record, with the average pension fund losing 15.2%.

The strong performance during Q2 2020 means that pension funds have now recovered much of the ground they lost during Q1 2020. Saying this, despite starting to make a recovery, the overall values remain 4.4% lower than at the start of the year.

At the start of the year when pension funds saw record falls, pension savers were urged to not make quick decisions about their retirement savings and instead consider the long-term investment, as Richard Eagling, head of pensions at Moneyfacts, explained: “After the sharp stock market falls in March 2020, regulators such as the Financial Conduct Authority and The Pensions Regulator were quick to urge pension savers to keep calm and not rush into any decisions about their pensions. The fear was that knee-jerk reactions such as changing investment strategies or making withdrawals at an unfavourable time could see individuals compound their losses and damage their long-term retirement prospects. Indeed, as the latest pension fund returns clearly show, those individuals that took such action may have missed out on rising pension values as the market recovered.”

The number of pension savers choosing to drawdown money from their pension fell by 42% in April 2020 compared to the same month last year. The latest data published by trade body the Association of British Insurers (ABI) has also shown the number of people taking a tax-free lump from their pension more than halved (-53%), while those withdrawing their entire pension fell by 30%.
Figures for March 2020 had already started to show this cautious trend, as 15% fewer people chose to use a pension drawdown, 29% fewer people took out a tax-free lump sum and those withdrawing all their pension in one go fell by a fifth.
Those selecting an annuity in March and April also fell by 36% and 56% respectively.

The ABI claim that pension savers are choosing to ride out the falls and volatility of the stock market and are holding onto their pension’s funds during a period of uncertainty about employment. The trade body anticipates that as lockdown eases, pension withdrawals may increase due to pent-up demand and in response to the end of the Government furlough scheme in October.
The potential of a high number of job losses arising once the Coronavirus Job Retention Scheme ends could see older employees having to revise their retirement plans with the potential of using their pension pots to fund an early retirement or as financial support while seeking a new role.

Representatives from the pension industry do agree that access to financial advice for those that unexpectedly find themselves needing to review their pension options will be essential.
Rob Yuille, assistant director, head of long-term savings at the ABI, said:
“As Covid-19 struck there was a fear in the industry and in Government that a pensions panic would hit, with mass pension withdrawals out of fear of stock market volatility and labour market uncertainty. So far, this concern couldn’t be more wrong. Instead customers have been holding off in large numbers.

“The pandemic is a harsh reminder of the uncertainty of how long your retirement might last, what it will look like and what it will cost. More than ever it has shown that when it comes to making decisions on your pension, you should get expert help.”

Quilter head of retirement policy, Jon Greer, added:
“The figures show that pension savers paused for thought before cashing in their life savings during the crisis. The fact there was a slowdown in withdrawals is reassuring and shows that on the whole, savers recognised that cashing in their pension during a dip in the market was unlikely to serve them well.

“However, it remains to be seen how many people start dipping into their pension pot in the autumn. As the Coronavirus job retention schemes and furlough measures wind down, more companies will be confronted with tough choices about which staff they can afford to retain. Older staff that find themselves out of work may choose to retire earlier than planned and others will use their pension to replace their income while they look for a new role.

“Provided people plan carefully, it can make sense to utilise pension assets this way. But it is really important to remember that drawing down your pension earlier can have a big impact on its longevity. Similarly, if you take flexible income now and then return to work at a later date, your contributions may be limited due to the Money Purchase Annual Allowance.

“It will be really important that as people confront these key retirement choices, financial advisers are on hand to provide expert guidance and pension companies encourage everyone to speak to a financial planner or make use of Government-backed services like Pension Wise.”

Nearly half of the over-55s have been preparing their finances for the tough times ahead by paying off their debts using equity release. According to data from Key’s Market Monitor report, 44% decided to switch their debts in the first six months of 2020, up from 37% in the same period last year.

Paying off debt using equity release allows the borrower to stop making monthly repayments, freeing up their day-to-day cash and ensures no risk of having their home prepossessed or legal action for non-payment of a debt. There is also no tax to pay on money borrowed under equity release.

The worsening economic climate, coupled with historically low interest rates, is making equity release more compelling for debt consolidation. For example, the best APRC for a lifetime mortgage (the most common form of equity release) is now 2.5%, compared to the best five year fixed rate mortgage at 2.8%. The average interest rate for a lifetime mortgage has dropped from 4.89% last year to 4.26% now, and borrowers will find more choice available, with 132 more lifetime mortgages available this month compared to July last year.

However, the effect of the Coronavirus lockdown on the demand for equity release overall has been a reduction in 2020. The number of plans sold has dropped by 10% in the first half of 2020 compared to the same period in 2019. Those wanting equity release for holidays and home improvements have both reduced so far this year as the Coronavirus lockdown placed severe constraints on holidays, travel and the ability to source materials and labour for home improvements.

Those looking to repay their debts using equity release will find their monthly outgoings reduce as a result, but borrowers need to consider that a lifetime mortgage has compounding interest costs. While they save today, the cost over time will likely be greater and will erode the value of the inheritance they can leave in their will.

This cost of borrowing with a lifetime mortgage increases the longer the debt or the interest remains unpaid. For example, borrowing £80,000 at 3% would cost £12,741 in interest after five years and £27,513 after 10 years. Those lenders that are members of the Equity Release Council offer a no negative equity guarantee, meaning borrowers will never end up owing their lifetime mortgage lender more than the value of the property. There are also options to protect a minimum sum for the purposes of inheritance.

Borrowers can mitigate the costs of interest on a lifetime mortgage by either choosing to make repayments or using a drawdown facility. Borrowers must choose a lifetime mortgage that allows them these options from the outset, or they could face an early repayment fee to switch later on. A drawdown facility is when a lender agrees to a total maximum amount they will lend, and the borrower can choose to access this in instalments. Interest is only charged on each released instalment and not the total.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Equity release may not be suitable for every person, so seeking advice is crucial to ensure they know of all other options available to them. According to Key, less than 10% of consumers who enquire about equity release end up proceeding, and instead may decide to downsize, seek support from family or just decide it isn’t the right time.

“Whatever consumers decide on, it is imperative they compare all their options carefully and consider the impact on any inheritance for their family, for example whether the released funds should be taken as a lump sum or drawdown, and whether downsizing or a retirement interest-only mortgage (RIO) would be a more appropriate choice.”

Read more about how equity release works or find out what to expect when you receive equity release advice.