Brilliant 👏

I wish I had a DB pension that paid me for life and increased with inflation.

Buy one with my DC pension? god no.

— David Hearne, CFP™ (@dontdelay) April 16, 2024

 

The two Daves are right. We would no more want to buy into a DB scheme’s secure pension because

1. We have the opportunity of cashing out, paying lots of tax and wondering what we’re going to live on for the next 40 years
2. We have the opportunity of setting up a drawdown from a fund we don’t understand , at a rate we’ve made up in the hope it will last as long as we do.
3. We could buy an annuity and pay 20% of our money for an insurance guarantee

All of these great options already exist

Who in their right mind would buy into a DB pension scheme , even if they had a chance?

1. A DB pension can invest in real assets, allowing it to pay pensions typically 10-15% higher than an annuity
2. A DB pension can pay discretionary increases if it works on a shared outcome basis
3. A DB pension has at least as sound security as an annuity.

Why would anyone want one of those?

• Who wants economies of scale?
• Who wants expert asset management?
• Who wants inflation linked income?

Didn’t we close down the DB schemes to get away from that sort of thing? Aren’t we much better as our own CIO, our own actuary, our own tax adviser? Surely doing it yourself is the best way, look at the FCA’s retirement income survey, more and more of us are running out own drawdown without any help from an adviser

Hit and hope drawdown

Let’s face it, most of us haven’t a clue when setting up a drawdown plan and evidence of that emerged once more as the FCA published disturbing figures on what people are actually doing.

For the vast majority of people with a sub £100k pot, a drawdown of 8% of more is the norm. Hope springs eternal. It is only when pots rise above £250,000 that the 8%+ drawdown isn’t the favored option.

The rule of 4 suggests that dividing your pot by 25 or 4% will give you a sustainable income increasing in line with inflation, so long as you know what you are doing on the investment front.

So we have the majority of people drawing down pots of £250,000 or less , doing so at twice the rule of thumb, taking real risk that their pot will run out before they do.

But forget the £250,000 pot for a moment, what’s your pot most likely to look like, if you are the average retiree, it looks pretty small

Interesting retirement income data release from @TheFCA today. Two thirds of pension pots are still under £30k when accessed for the first time. That’d provide a pension of under £40 a week so no surprise that the majority just cash the whole thing in.https://t.co/uqtt2nGw71 pic.twitter.com/DwlS4DQXTJ

— stuart mcdonald (@ActuaryByDay) April 16, 2024

The Government may feel sanguine that those with small pots don’t have a tax problem but that assumes they’ve only got one of them. Right now people are retiring with multiple pots with red and orange flags being thrown at them if they try to combine them. Goodness only knows how many small pots are part of much bigger  DC savings – though the FCA data is good, it cannot tell us about those trying to retire with multiple entitlements.

But aw Andy Young points out, this is tomorrow’s crisis.

It is rational just now. Small pots are largely an irrelevance for provision in retirement for current retirees. The issue is what happens as AE matures.

— andrew young (@glesgabrighton) April 16, 2024

Today’s is the total failure of Government interventions.

Despite all attempts to make Pension Wise relevant to people taking decisions, it isn’t. The only people using it are the annuity buyers (the buyers who know it all already. Drawdowns and UFLS users have no use for Pension Wise, those who cash-out don’t go near it. Pension Wise is falling in its usage and should be dropped , money should be reinvested in what was TPAS which can at least talk numbers.

I take no comfort in these FCA numbers, they tell me that the vase majority of people are taking short-sighted decisions with little regard to their financial futures, they are plugging gaps between now and getting their state pension , they are stacking up their bank accounts, they are doing almost anything but making sound financial planning decisions.

Small wonder we would not want to buy into a DB scheme – even if we had a chance.

Or would we?