Taking decisions is tough, and those decisions that impact the rest of your life are some of the toughest. In this, the second of his three part series on pensions for IFA Magazine, Henry Tapper provides a personal perspective on decisions relating to crucial de-accumulation strategies and the role of advice.
We expect those people who leave workplace pension plans to make choices between an annuity, draw down or cash with only the slightest understanding of their different implications.
This is simply not fair. For generations we have been promised that the welfare state would provide the first pillar of security for us as we grow older. That pillar remains but we are searching for Beveridge 2.0, a welfare system that copes with a generation for whom living to 100 won’t be that special.
The second pillar of our welfare system, the occupational defined benefit (DB) arrangement is still in place for those in the public sector, but few working for private employers are still accruing and the prospect of bond yields remaining low for another decade is “odds-on”. The certainty of DB is now a bet each of us must take on the quality of the employer covenant. Our DB promises may be no more than junk bonds, with the pension protection fund (PPF) as a lifeboat for schemes under-water.
But it is the third pillar, the defined contribution (DC) pots that were originally meant to top-up pillars one and two, which are most at risk. Whatever the promise of the statutory money purchase illustrations (SMPI), the grim reality of the annuity quotation is likely to deliver only a fraction of the initial promise. Those who planned around an 8 or even 13% return and an annuity conversion factor of 10:1 are rightly feeling they were oversold (if not ripped off).
Some 450,000 of us reach 55 each year. This year I happen to be one and I am asking myself just what I should do?
What are the options?
The first question I am asking is what I can get from Pension Wise. The second question, once I have seen Pension Wise, is what advice I need to take (if any). Even as a former financial adviser myself (1994-1995), I will struggle to balance the need for capital, the need for income, my capacity to earn and the demands of the tax-man. I will almost certainly take independent financial advice, but I don’t feel I should have to.
I feel I should have the right to advise myself, just as I thought I had the right to advise myself on my various personal pensions, 226 policies and even a section 32 buyout policy (with grandfathered 3/80ths). Clearly I didn’t as some of the policies are still sitting with the original insurers – because no-one would let me be an insistent customer.
It’s not just tough to take decisions, it’s tough to get insurers to accept your decisions even when you’ve taken them. For advisers reading this article, just imagine how disappointing it is for someone to battle to an understanding of what he’s got only to find that his pot cannot follow him!
I anticipate that even if I can eventually aggregate my outlying policies I would struggle to self-invest on a non-advised basis and before you say that is tosh, I’d point out that I am once bitten!
This sense of powerlessness is extremely frustrating to me and many of my friends, many of whom are in professional services firms. You might argue that those who live by the timesheet should pay their fees but I feel under no obligation, having paid commission on most of the products I’m now using, to have to pay another set of fees.
Cost-benefit analysis
But what about those individuals who are at the other end of the spectrum? What of the mid-market to which the Financial Advice Market Review addresses itself? For these it’s not the lifetime allowance (LTA) and annual allowance (AA) that are issues but the distance most ordinary people are from the LTA.
For most people, the concept of paying for financial advice is still quite new. It was, till January 2013, often billed as free and “free” sticks in the head. The advice they received at the point of sale was far from free and the impact of that advice, in pensions terms, has been back-end loaded. If you could get a statement on how much was taken by capital and accumulation units in the final year of a £30,000 pot, I’d be surprised if the number was south of £1000. That’s a lot of money to pay for no advice at all!
Yet, it is at this point, and on a pot with not much more than £30,000, that the average DC policy holder is being asked to pay advisory fees. Is it any wonder that he or she is resistant?
The conventional wisdom is that individuals should take financial advice at retirement but a large number of people like me, do so most reluctantly. A very large number of people with what we call small pots, consider the option to be flush with cash a windfall. That there is no plan B once the pot has been cashed out is of no importance at all, sexy-cash beats boring pension – especially when the pension comes with an advisory price-tag.
I want less “cashing-out”, I want to restore confidence in pensions and I want people exchanging their retirement pots for a lifetime income stream. I would no more advise myself to buy an annuity today than to seek a “free pension review”. But I can see no more value in setting up an advised drawdown policy than in buying an annuity – if all you have to draw is £30,000.
So what is the great future hope for the mid (or mass) market?
Having read this far, you may be hoping for a big reveal! If you had asked me this question 14 months ago, I would have pointed to Steve Webb’s final act as Pension Minister, the Defined Ambition section of the Pension Act 2015. The big idea, that we could collectively spend our savings from one big pension pot, with the shares determined by people who understand the numbers – actuaries. The big idea included scope for pooled mortality meaning each great big scheme acted like its own little insurance company, and longevity risk being taken with the scheme.
But this utopian vision had a dystopian setback around a year ago when our former pension minister bumped Defined Ambition from the policy roster. Put simply, its regulation is only half built and Defined Ambition looks like a house without a roof.
What would have made this collective means of spending our pension pots so attractive was that it really would have been a non-advised solution. Bulking individual pots into one great big pot would have brought down admin costs and provided buying power with fund managers. More importantly, rather than employing an individual IFA as actuary, CIO and pension consultant, the collective model would have spread the cost of these professional services across a constituency of thousands.
The policy alternative to the collective approach is the mechanisation of advice into a digital algorithm. A system of triggers can deliver non-advised solutions provided that you trust the robot. But – unlike collective solutions which are used successfully in Europe and some parts of Canada, there really isn’t a successful model for the robot in retirement.
Like with driverless cars, the current generation of retirees are probably seeing second mover advantage. “Let’s wait for a few crashes before we buy ours!”.
Well, I said that I would rely on an adviser for my “at retirement” advice and though I say it with gritted teeth, I fear I will rely on an adviser till I pop my clogs or buy an annuity (hopefully not consecutively!). But to recommend advice for all, seems to me like failure. I have defined ambition and I’m not employing a robot!
Henry Tapper – Founder of Pension PlayPen
