Pension freedom means ever more people risk missing out on vital income, says Jeff Salway
Investors and pension savers in Scotland are putting their financial security at risk by playing too safe with their cash, new research suggests.
Scots admit to holding twice as much of their savings in bank accounts as they think they should, according to a report out today from investment giant BlackRock, which revealed that a growing number are worried about their future finances.
The Scottish results from its annual Investor Pulse survey also show that few have taken financial advice despite anxieties over their financial security.
The research is published less than three weeks after the introduction of new pension rules that are expected to result in far more people managing their own investments in retirement.
The typical investor north of the Border holds 65 per cent of their savings in cash, well above the 34 per cent they believe is necessary. But more than half plan to boost their cash savings over the coming year, even with interest rates expected to remain at rock-bottom for at least the rest of 2015.
Tony Stenning, head of UK retail at BlackRock, said: “Having a cash safety net and being able to afford things without using credit are key factors to making Scots feel more in control of their financial future. It’s perhaps unsurprising then that Scots tend to hold a large portion of their savings and investments in cash.”
Half of savers north of the Border have money in cash accounts so they can get access to it when needed, while 41 per cent said it made them feel safer. One in six said they believed that cash wouldn’t lose its value, overlooking the threat of inflation.
William Hunter, director of Hunter Wealth Management, said: “Although cash is a necessity and a comfort, holding too much for too long will fall foul of the hidden bogeyman – long-term inflation, which will substantially reduce what that money can buy.”
And leaving too much in cash will ultimately prove the financial downfall of many savers, he added.
“People like the comfort of cash, but too much can be a bad thing,” said Hunter. “They are going into cash because it’s less risky, but perhaps the greatest risk sometimes is in being too cautious.”
Those who can afford to take financial advice and are willing to pay for it are invariably likely to get the best from their savings. But only 16 per cent of savers and investors in Scotland use an adviser, according to BlackRock. The average investor with an adviser has 39 per cent in cash, compared with the 71 per cent of those who haven’t taken advice.
“Unfortunately the unadvised are making the wrong choices as to where to put their hard-earned money and need to wake up to the fact that quality financial advice isn’t the preserve of the rich,” Hunter argued.
Those with the most to lose include the over 55s taking advantage of recent pension reforms to draw cash from their pensions.
Scheme members switching that pot of money straight into cash accounts risk watching their pension savings lose value in retirement.
“A significant problem with people taking money from their pensions and putting it in a bank account is that they’re often moving it from a tax-free environment to a taxed one,” said Hunter.
“Unfortunately pension freedoms will make the unadvised poor. The only winner will be the taxman.”
But Scots aged between 45 and 54 are the least likely to be putting some of their pay aside for retirement, BlackRock found. Six in ten of all Scottish savers worry that they won’t be able to afford a comfortable standard of living when they retire.
“The fact that so many 45 to 54 year olds haven’t started planning for retirement is frightening – you can count when they’re going to need that money in terms of months,” said Hunter.