“Drawdown scares me”.
It scares me because I am on my own, it scares me because I get a bumpy ride and most of all it scares me because I know that if I drawdown at a minute of an hour of a day when the market spikes downwards, I may never recover.
“I want to drawdown my income in retirement, but I don’t want nasty suprises”
Which is why I’d rather be doing this drawdown thing with other people. I want “average everything”, I don’t want to be the best or the worst, I want to be in the middle – I want things to be predictable.
Now some would say I want to share risk. If they mean by this I want another generation to take on my risk, I say nah! I don’t want to dump on my kids.
I want to pool my risk with my peers, with all the other people drawing down from our pool of money. Risk pooling (mutual insurance) -yeah , risk sharing (dumping) nah!
Now I know that I’m not like Joe down the road who wants to buy an annuity because he can’t bear the idea of anything but the same pay cheque each month.
And I know I’m like Sally in the house opposite who manages every penny of her finances to the minute. I want to be Mr Average, the bloke who gets a decent whack from his retirement fund and draws it down in a tax-effecient way according to his needs.
I don’t want nasty surprises, I don’t want to run out of money in my nineties, I don’t want to borrow money against my house, off my missus. I want a fair deal , a predictable income – is that clear enough for you?
“So what are you going to offer me Mr Pension Man?”
CDC means nothing, it is just a codename, like PADA was a codename for NEST. What CDC should be is “a predictable alternative to drawdown”. Defining CDC by what it can do makes more sense than defining it by how it does it. I’m more interested that a Dyson can clean my carpet or dry my hands than in the technology behind it- though I like to know there is technology behind it.
So here’s what I can offer you.
- A predictable but not guaranteed income
- Protection of your income if you outlive your expectations
- Options to increase or decrease your income according to your needs
- Opportunities to draw lump sums if and when you need them
- Options to insure health related events- (long term care, immortality)
Put all those things together and you come back to a simple means of organising and managing your finances in later life.
And , because you like to know the technology behind the Dyson, here’s what goes on “under the bonnet”
- Money from people’s pension pots is pooled into one big pot
- Money is managed on a prudent basis by expert fiduciaries (to the highest standards)
- You own a part of the pot- your record is adjusted according to what you drawdown
- You are regularly offered insurance if you want greater certainty about health events
- You have the option to transfer-out if you think you can do things better on your own
- The liabilities (eg expectation of future pay-outs) are calculated by Actuaries
- Reporting on the assets and liabilities is regular and to everyone.
- Those who want to be more involved in the management of the assets, liabilities and reporting can do so as member nominated fiduciaries.
- I don’t have a preference if these kind of arrangements are set up by insurers or as mastertrusts,
- I don’t mind if they are for profit or not for profit and I don’t mind if they are connected to existing workplace pensions (GPP’s mastertrusts or single employer occupational schemes).
- I don’t mind if the money that is managed comes from DC or DB arrangements (so long as any guarantees are properly bought out).
There is nothing in law to stop these schemes being set up from April 2015, it will probably be easier to set them up using the regulations that govern occupational pension schemes (TPR supervised) but the FCA can easily regulate an insured version governed by the new IGCs.
Finally, I don’t think there are any particular barriers to this happening and being developed in the next twelve months.
As I said at the top, “drawdown scares me” – but I want control of my finances in retirement and I don’t want to annuitise anytime soon.
Today is April 5th 2014, by April 5th 2017 I will be 55 and I will want to drawdown without getting scared.
So , for no reason other than self-interest, I will be campaigning to have a predictable alternative to individual drawdown. I am quite sure that all my friends who own SIPPs and manage their own investments will want to go it alone and drawdown using individual policies, but I’m happy chucking my money in a general pot and paying someone else to do all the hard work of managing assets , keeping records and predicting future liabilities.
“Drawdown for Dummies” – seems a better working title, I’m sure someone will come up with something as memorable and elegant as “NEST”, for the moment I’ll stick with a “predictable alternative to drawdown”.
This article first appeared in www.pensionplaypen.com/top-thinking