Retirement saves who take money from their pensions to invest for better returns may be jumping from the frying pan into the fire.
Many pension funds are posting low yields as the markets have seen billions of pounds wiped off company values worldwide.
The result is some retirement savers are in pension drawdown to pay down debts or keep their cash in a rainy day bank account.
These accounts pay a miserable return and although paying off debts can give a feelgood factor and free up cash, unless the money is reinvested the result is savings are diminished.
The issue for many retirement savers is the choices of where to invest are limited.
Cash v stock markets
Although the number of products looks vast, the options come down to a simple choice – save cash or invest in the stock market.
Cash is seen as a poor choice because inflation, charges and low interest rates erode the profits and capital.
Stock markets will return a gain over time, but what’s the point?
If a saver takes £20,000 out of a pension as seed capital for an alternative investment, they will pay tax, early exit charges and possibly advice fees.
That now smaller pot of money not only has to equal the growth the gross sum yielded in the pension, but also has to wipe out the cost of moving the money as well.
Few investments offer that type of stellar return.
Best financial option for over 55s
So, in many cases, the best option is leaving the money in the pension.
Financial firms have a campaign to talk up annuities at the moment.
They fail to mention that independent research by financial experts such as Moneyfacts have revealed guaranteed incomes paid by the insurance contracts have slipped by 10% in the past year.
And they were not that good to start with.
Annuities are not all bad news for retirement savers. Enhanced annuities can offer some reasonable returns for smokers or those with other lifestyle factors to consider.
Another factor to consider is the advice source. Talk to the government’s Pension Wise service or an independent financial adviser – avoid your pension provider, bank or tied agents who can only give recommendations and information about their own products.
