How COVID rocked the pensions landscape

Coronavirus has sent the UK into its worst recession since records began. Pension providers and savers alike have not escaped unscathed as they face unprecedented economic upheaval

The coronavirus pandemic has shattered lives and left many to pick up the pieces of their broken financial future. A YouGov poll with Smart Pension found more than one million 55 to 64 year olds are now set to delay their retirement due to the pandemic. 

From mass unemployment, furloughs, reduced income and volatile global markets, a wave of economic hardship has left many with shrinking incomes and pension pots. However, the last year has also strengthened financial resilience across demographics, as people begin to prepare for an uncertain future, not just a rainy day. 

Over-50s facing job insecurity

Once valued as the safest way to ensure a smooth retirement, attitudes towards pensions had their ups and downs long before the pandemic. While many baby boomers traditionally enjoyed lucrative pension plans, a survey by PensionBee of 1,000 people aged between 55 and 70 found 40 per cent of working respondents would want access to their money if they became unemployed, with 22 per cent saying they are more likely to make a withdrawal due to the pandemic. 

And these findings seem to be borne out as a record number of over-55s have dipped into their pension pots due to the current uncertain climate. According to the latest HM Revenue & Customs figures, 360,000 people withdrew £2.4 billion in flexible payments from their pensions in the fourth quarter of 2020, a 10 per cent increase on Q4 2019. 

Former business consultant, Steve Jenkins, aged 60 from Manchester, is an example. “The pandemic, coupled with successive lockdowns has meant I’ve had to reassess my financial situation. I was recently made redundant and needed to ensure I was in a financially secure position to weather the foreseeable future. I’ve reassessed my priorities and as a result I’ve had to withdraw some of my pension in the event my health deteriorates further and I need an adequate safety net,” he says. 

While the spotlight on job security has largely focused on Generation Z, according to the Learning and Work Institute over-50s are more likely to be long-term unemployed and, as COVID-19 continues to add pressure to multiple industries, patterns of unemployment are forecast in the job market, putting pension planning in a precarious position for many nearing retirement. 

Getting younger people invested in pensions

And baby boomers aren’t alone as, according to a survey by Invesco, millennials have a “worrying lack” of awareness around the purpose behind pension savings. Some 54 per cent of 24 to 34 year olds surveyed thought a pension was deposited in a savings account to accumulate interest, rather than viewing it as an investment tool. 

Historically, the financial sector has filtered access to its more mature products through coded language and poor communication, and the pensions industry is no different. However, it seems successive lockdowns have contributed to the rise in younger generations becoming more informed and opting into pensions. 

Penfold, a fintech specialising in pensions for the self-employed, has seen the number of millennial customers grow by 150 per cent over the course of 2020. Analysing further, 92 per cent of under-30s who use Penfold have chosen a level-four, high-risk fund, compared to 66 per cent of over-35s. 

Pete Hykin, co-founder of Penfold, says: “The language and wording used by the pensions industry has been repeatedly highlighted as a huge barrier to getting more people saving. The industry needs to solve this as it deters people across age, income level, educational background, job type from engaging further. Technology can help here, offering people the flexibility to access information, rather than assuming everybody has access to a financial adviser.”

What the pandemic has highlighted is the importance of technology in democratising finance, including pensions. Now, more than ever, we are witnessing a groundbreaking shift in attitudes towards pensions, as access to financial literature and technology increases. 

“There’s been a big mindset change from an audience typically reticent to engage with pensions.” says Hykin. And he isn’t wrong as 2020 ignited mass conversations, with knock-on effects, regarding equality and justice as a result of the Black Lives Matter protests. This has pierced the conscience of global businesses, where racial discrimination, environmentalism and economic disparities are discussion points being brought to the forefront, amplifying the way in which younger generations interact and engage with their finances. 

Using pensions to make a difference

“We’ve seen a rise in people looking into the social impact of their pensions,” says Hykin. “What’s most exciting about millennials and Gen Z is they are actively engaging with these companies and consciously considering where their wealth is invested and who is being impacted. They’re beginning to see pensions as an investment for the future and they want to know they’re building a better world.”

Zahid Mahmood, a 26-year-old IT developer from London, reinforces this point: “My first real exposure to pensions was when the human resources team at my place of work asked how much I’d like to contribute on my first day; I had no idea.” Mahmood’s limited exposure to pensions meant he wasn’t best informed on how a pension works, what he would be investing in and the associated tax benefits, to name a few. 

“The change in my attitude came when I realised pensions were another way to invest. By September 2020, I had learnt enough through personal research to understand how a pension can be a powerful tool for building wealth. As a result, my strategy has become more aggressive in realising the tax efficiency of pensions.”

While COVID has certainly shaken the world, it has also provided ample opportunity for people to take a more holistic understanding of their finances. The increased time at home due to lockdown, combined with assessing the longevity of the current economic downturn, has forced people to consider the financial options in relation to their pensions. 

We are yet to fully understand COVID’s long-term effect on unemployment, but pensions have long been an established financial tool, aiding governments, businesses and society by transferring the working population into the next phase of life and this is unlikely to change. With technology helping to democratise financial access, savers are likely to have a more invested relationship with their providers. 

Clare Reilly, chief engagement officer at PensionBee, says: “The increased data transparency through technology has revolutionised the way we engage with our pension. We want to know where our money is going and build a sense of ownership.” 

Whether it be more informed lines of communication, financial literacy, technological advancements or data clarity, pension providers are re-examining their approach to meet the changes in consumer habits. With legislation adapting to meet society’s changing career cycles, choice and autonomy are set to pave the way pensions are managed.