We examine the big stories, trends and pitfalls of a very dramatic year for retirement issues.
In a very difficult year, where immediate needs and personal emergencies have frequently had to take precedence over any kind of planning for the future, some trends among pension holders have emerged.
Here, we look at the big pensions issues of 2020, as well as common pension pitfalls, trends and what pensioners’ current hopes and fears are.
The year in pensions
A flight to security has seen those who have not suffered job losses or an income drop increase their savings and pension contributions quite dramatically. It has been a ‘YES’ year for this group – a ‘Year of Extreme Saving’.
Despite stock markets suffering a decline in the first half of the year, improvements in the second half will have helped boost the confidence of many pension holders, who, when we surveyed them for the Great British Retirement Survey, were particularly anxious about the impact of coronavirus on their pension pots. Their fears may have eased a little since.
Meanwhile, those out of work and struggling to get by on benefits or other forms of government support may suffer the lasting impact of the pandemic for decades.
This could be in the form of reduced savings and pension pots and higher debt repayments in the future following the knock they have taken this year. We previously highlighted the impact on young unemployed people in particular. As the impact on livelihoods has been massively uneven, so too has been the impact on personal wealth.
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The retirement outlook for people in 2020
A general sense of strain on retirement pots, from living costs, poor returns, and supporting loved ones, is leading to greater pessimism around how long this cash will last.
In 2020 this led to more older people considering working for longer, and also dipping into their pension pots.
Five pension pitfalls
1. High housing costs
Our Great British Retirement Survey 2020 shows these affect adult children, but also the retiring generation who find it expensive to downsize. One-in-five non-retired people have gifted some of their pension lump sum to adult children to help them get on the property ladder, while 51% of retired respondents had helped children buy a home.
This generosity could come at a cost later in life. Strain on pension income from using lump sum money in this way is a consequence of housing costs being too high for many people, who cannot save a deposit for themselves.
2. Higher cost of living
Relative to lower wage growth this is not just impacting older people directly, through their own bills, but also family members they feel a duty to help. Help with childcare is a good example of this. Childcare is expensive, yet living costs (including housing costs) mean that two parents are often required to work.
Grandparents increasingly pick up childcare responsibilities as a result. Around 29% of retired people with grandchildren now do some childcare, up from 18% last year. Non-retired people with grandchildren increasingly expect they will have to perform childcare when they retire, with 36% now expecting to do so, up from 20% last year.
3. Unexpectedly low returns from stock market investments
These, as well as low interest rates, affect savings and annuity rates. Low stock market returns can dent both the growth of a pension investment portfolio and the level of income it can generate, for those who take their income from their investments.
The average return this year among interactive investor customers was -1% in 2020. However, self-invested personal pension (SIPP) investors fared better, with returns of 3.8%, and active investors returned 1.8% over the year.
4. Unexpected cost of care
The cost of care and how to pay for it continues to be a worry. The average cost of a care home per year is around £34,000, according to not-for-profit company Paying For Care.
More than half (52%) of retired respondents had not prepared but were worried about it. With so many demands on pension pots early on in retired life, the cost of care will increasingly become a problem for older people.
5. Unexpected life events
Issues such as divorce, ill health, caring for a loved one or changes to the state pension age can force us to work for longer and cause financial hardship.
The coronavirus pandemic itself is an unexpected life event, particularly for those who have had to prioritise caring for affected relatives or been bereaved as a consequence. We expect to understand more about how this has impacted people’s retirement plans in next year’s survey.
There also appear to be two mistakes happening with retirement savings, according to the Great British Retirement Survey:
1. Holding too much cash
Retirees who are worried about the risk of loss from stock market investments run another risk: keeping too much in cash. It is something that concerns the Financial Conduct Authority, a regulator, as lower returns on pension pots increases the risk that people will run out of money.
2. Giving too much away or spending too much
Generosity towards younger family members is a heart-warming trend, but there is a risk that too much of this will lead to running out of cash to meeting living costs in later life.
These pressures and these mistakes, together with an ever rising threat of scams targeting retirees and a lack of access to affordable financial advice for those who most need it, mean there is a critical need for free information that is delivered at points people will be most receptive to it.
That’s why interactive investor recommends that wake-up packs be introduced at key life stages, not just as someone approaches retirement. A pension journey is for life, not just for the 50+ age group.
Five hopes and fears for our retirements in 2020
Our Great British Retirement survey revealed a lot about how we viewed our pension pots during this dramatic year.
1. Could this year have spelled the end of Saga-lifestyle retirement dreams for us all? Expectations for an improvement in lifestyle in retirement went down this year, with people in general becoming more pessimistic about their living standards when they stop work. There was an 11% rise, from 11% to 22% of people, saying they don’t know if their lifestyle will improve when they retire.
Correspondingly, there was a 24% drop, from 51% to 27% of people, who said they think their lifestyle will improve when they retire. Most now think their living standards will remain the same.
2. Stock market crises have become the number one source of worry among retired people. Around 52% now say this is their main concern, up from 42% last year. This replaces the rising cost of living as the most concerning factor, which is now the biggest worry for 42% of retired people, compared with 50% last year.
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3. People worry about having enough money to leave to their children when they die. Around 82% of retired people want to leave an inheritance, compared to 78% of those still working.
However, among non-retired people, their biggest concern was money they’d like to leave to their children going on long-term care (27%). For 22% of retired people, their biggest concern is not being able to leave loved ones money when they die.
4. The pandemic has not quelled relocation dreams. People still hope to move house when they retire. More than one in four (26%) of people plan to move when they retire, with 37% of Londoners planning to up sticks and leave the capital when they stop work.
5. There was a rise in financial regrets this year, with an increase from 16% to 21% in the number of people regretting poor investment decisions and a rise from 2% to 7% in the number of people who regretted buying an annuity.
Five pension trends we saw in 2020
1. People aged between 30 and 49 increased their pension contributions significantly during the pandemic. interactive investor customers landed on self-invested personal pensions (SIPPs) as a good destination for the spare cash they suddenly had as a result of lockdown measures.
Between January and October 2020, there was a 34.7% rise in the average value of contributions compared to the same period last year among 30 to 39-year olds. There was another big rise in the average value of contributions of 18.3% between the same periods among 40 to 49-year olds.
2. SIPP investors at interactive investor outperformed the market – with their portfolios rising by 3.6% over the year, compared with an overall decline of 1% for investors in general.
Interestingly, SIPP accounts opened by women this year have grown faster in percentage terms than those opened by men over the year to date (to end December), which suggests a growing trend of female investors thinking seriously about their long-term financial health.
3. Over 55s increasingly had to dip into their pensions during the pandemic. The ABI reported a big jump in pension savers accessing their pots after the first lockdown ended.
4. There was a disproportionate rise in the number of older people losing their jobs this year, with the over 50s now at greatest risk of being long-term unemployed, according to the Department for Work and Pensions. The Institute for Fiscal Studies found that one in eight workers over 50 had changed their retirement plans as a result of the pandemic, with more choosing to work for longer if they can.
5. Pensions gained prominence as a topic on social media – there were 4,785 mentions of ‘pension savers’ and ‘pension investors’ on Twitter, forums, blogs, news websites, tumblr and YouTube in 2020, according to consumer intelligence agency Brandwatch, up 8% from 4,425 in 2019.
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