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Pension freedoms will increase flexibility and risk taking


New research from the Yorkshire Building Society shows that the new pension tax-free allowances and increased flexibility will boost both saving and risk taking. Their survey finds that one in two savers and investors will be willing to take more risk without understanding the implications for their money.

Less than half understand what peer-to-peer investment means with little knowledge that money could be lost and one in three believes an annual return of 6.00 per cent or more is achievable on  long-term investments despite risks to capital.
Two out of five will increase or start saving following ISA flexibility and 47 per cent, once new tax-free allowance start  next year.
However the increase in saving could mean a rise in risk-taking with one in two savers believing the new rules give them the licence to take more risks with their money. Around 10 per cent of savers – equivalent to 1.8 million – say they will definitely take more risk while 40 per cent say they will look at more risky investments depending on circumstances.
That includes investing in peer-to-peer (P2P) but research highlighted a lack of understanding of it – just 42 per cent of people claim to be familiar with the term, and of those, 60 per cent were unaware that they had no protection under the Financial Services Compensation Scheme (FSCS).
The study shows that attitudes to returns are a guide to the potential issues ahead – its survey among savers and investors shows on average they are targeting annual returns on savings and investments of 5.30 per cent despite historically low interest rates and recent stock market volatility.
But more than one in three (34 per cent) are targeting an annual return of 6.00 per cent over at least five years with one in eight believing 8.00 per cent or more is achievable without taking into account any need to have access to their cash or potential losses of capital.
Financial advisers are concerned that the new saving and investing rules are likely to lead to more risk-taking without investors understanding the potential for losing money. Around 70 per cent of those surveyed say they believe clients will look to riskier investments. Nearly half (45 per cent) of advisers believe the new rules will increase interest in P2P lending.
Andy Caton, Executive Director at Yorkshire Building Society, said: “The Government is helping to encourage saving and investment with new rules and looks as if it will be successful with people keen to take advantage of increased flexibility and new tax-free allowances.
“Providers need to match that ambition by helping to encourage responsible saving and investing as there is a genuine threat that enthusiasm for saving and investing will be damaged if people are exposed to unnecessary risks they do not understand.
“Clearly there is evidence from the research that some have unrealistic expectations on the levels of returns they can achieve over the long-term with some people believing 8 per cent a year or more is realistic.
“Advice will be crucial in helping achieve success for the launch of new savings rules and we would urge anyone considering riskier investments such as P2P or equity-based investment to take independent financial advice before doing so.”

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