Ours to spend!
If I were to give you £100,000 and tell you that that was to bide you over to the end of your life you might initially be excited – you might then become apprehensive and you might eventually give the money to someone else for management,
The pension windfall that many of us will receive at 55 is just such a gift. True it is our own money, saved either from our own resources, in lieu of pay or in lieu of SERPS/S2P. But it is money that has never before been real (as in realisable).
It is money that has been in a wrapper called “pension” with a “not to be opened till 55 and then without the express permission of HMRC/financial adviser/pension provider”.
It hasn’t really been our money- it’s been making someone else money – but it’s not like our house or our stamp collection or even the shares we got when we worked for zyz. It’s not ours to spend.
If you cant trust anyone – do it yourself!
If I was George Osborne , I would be marketing the whole pension freedoms project under the “yours to spend” banner. If, as Hargreaves Lansdown predict, 200,000 cash out their pensions next year, it’s not just that they want to spend their pot, it’s that they want their pot back from the control of others -trustees, insurers – even SIPP managers.
They might rather do it themselves, pay the tax but not be beholden to someone they don’t know, trust -let alone like. Let’s face it, have you ever seen a financial adviser or pension fund manager portrayed sympathetically in the mainstream media, the last one I watched on Coronation ended up driving his family off the edge of a dock!
In a brilliant blog (here) Mark Scantlebury and a group of friends explore why the people who run and sell pensions are so distrusted. I won’t rehearse the same old ground. When I went to the Pitch a couple of weeks ago, one of the judges- a serial entrepreneur fingered me after my pitch
you guys in pensions have ruined two of my businesses, I’m not going to let you do it again
I asked her how she was going to avoid pensions with her sixties looming..
I’m going to do it myself
So how can we help people do it better?
I imagine the journey people take in retirement as needing some kind of transport. The alternative is you spend all your money on day one and never go anywhere!
And the choice of the form of transport
– communal (CDC or annuity),
or taxi (advised drawdown)
or hire-car (self- advised drawdown)
is up to the people taking the journey.
To extend the analogy, until recently the only way to travel was by barge; the annuity got you there slowly and safely, but it was a little boring.
I’m trying to imagine what is needed for my new transporters and I’ve decided their are four essentials
- There must be a trusted brand providing management
- The vehicles must be properly powered (with the right investment options)
- The vehicles must have sound chassis- (properly administered)
- There must be passenger information
- There must be a driver – at the controls
A trusted brand…
Supposing that a new and trusted financial brand – Virgin Money – Metro-Bank – Money Saving Expert – Pension PlayPen, decided to set up a product that helped people organise their finances to pay themselves an income for life- what would it look like?
Well to begin with – there would have to be an investment platform- either an insured one or one of the new funds platforms like Ascentric, Nucleus or Hargreaves .
A decent chassis…
Then there would have to be a back-office system that kept a record the state of play-
- how much money was left in the pot?
- what the tax position was (lifetime allowance, annual allowance, income tax etc)?
- how had transactions been processed ?
There would have to be a dashboard for people using the system to help them understand what was happening.
The key gauges would look like those on a car;-
- a gauge showing the fuel burn and whether it was higher or lower than expected;
- a gauge showing how far it was from the expected destination- sadly the anticipated date of death
- and a final gauge showing the likelihood of getting to the end without running out of petrol
Other gauges would show how close someone was to exceeding their lifetime allowance, what headroom they had to top up their pot with new contributions and where the person was relative to their current income tax bands.
For someone to be able to the pension transport system they would, at the very least , need to have the investment engine, the administrative chassis and finally the dashboard to see how things were going.
Someone to drive..
But there is one other aspect to this vehicle that is need, a system of controls that allow the vehicle to be driven. These must include a steering wheel to determine the direction of travel (let’s call this the fund selector), a brake to ease off the speed and an accelerator to speed up. Let’s leave any more complicated controls aside.
Pension Freedoms = Your choice of transport
I believe that before too long, anyone who has a pension pot will have access to the transport system and the choice they will have will depend on the amount of control they want.
For some they will want to let the “train take the strain” and will be happy to let all investment and income decisions be taken by a trusted third party. This could be set up by a union or a trusted financial brand (MoneySavingExpert, Pension PlayPen)! They would set the burn rate on your money, maybe by looking specifically at your health or maybe treating you as one in a pool of all the people on the train.
For some, a taxi- driven approach will be “deemed more appropriate”. So an adviser will be brought in to drive the car and manage the fuel efficiency to make sure you get to your destination without running out of money. People will be able to find taxi-drivers at the MAS taxi-rank- sorry Directory
Finally , there will be dedicated enthusiasts determined to drive their own pension car. It may not be a Lamborghini but it should be a robust vehicle with an MOT provided by an IGC or similar . If you want self-drive, a map, instruction manual and a proper car is about all you expect.
We have the drivers – we don’t have the vehicles (yet) !
We do have taxi-drivers, they are called IFAs, we do have train-drivers- they are currently managing DB schemes but they could as well switch to running CDC options for those who want the train to take the strain.
Those who want to drive their own cars have probably taken instruction. There are a small group of people (Emma Douglas called them badgers) who will take to the road without anyone’s help. Fortunately it is only themselves they can harm!
What we don’t have are the right pension vehicles – whether collective or individual which give all types of travellers the view of their financial future necessary for them to decide how much they want to do themselves.
So we approach April 2015 with a blueprint for the travel system of tomorrow, but not the infrastructure.
Can we manage the queues while we build them?
Fortunately , the numbers taking decisions in 2015 are relatively few and they can probably sit a few months on the platform or car showroom or taxi-rank waiting for the right form of transport to show up.
But the problem will be impatience. Many will simply decide to take their money and run, (200k according to Hargreaves Lansdown). The longer we leave it to find the right vehicles to take people forward, the more will simply take their money to their bank account and away from pensions.
We need to encourage people to come aboard!
If you’ve read this far, you’ll know that for most people , taking money from a efficient environment where there are tools to enable people to manage their pensions and put it into bank accounts where there is no help from the tax man or from experts, is a bad move.
There are exceptions, if you’ve got a low life expectancy or a very small pot and an unused personal allowance and/or a pile of debt, you are probably best spending your pot (as the Citizens Advice Bureau should tell you).
But most people have got more ambition with their retirement savings than to spend them day one, most people (70% according to Aon Hewitt) want a lifetime income – a pension – which supplements what they get from the State.
Pensions people should be manufacturing vehicles as you read!
If we believe we are up to the job of managing people’s pensions, we cannot sit on the sidelines and allow the money to seep away, we should be working with each other to build these pension vehicles.
By way of a “fantasy team” we might haveMartin Lewis talking with Paul Bradshaw talking with Sue Applegarth talking with Steve Bee to create new products that win back the trust of the many.
This might sound fanciful and I guess it is . But there is such a great opportunity to get it right! We have to think outside the traditional box and find a new way to deliver – whether we call it CDC or collective drawdown, or synthetic annuity or individual drawdown or defined ambition.
The game changer is the transport system!
The game changer for the consumer will be the ability to do it themselves. Right now people know that their pensions are “theirs to spend” but it is one thing to have the vouchers, they need a way to get to the shops.