We don’t need financial chauffeurs- we need driverless pensions.


Paul Lewis helps you find a good financial adviser

In his article “Find a good financial advisor”, Paul Lewis argues that most people do not need a financial advisor at all, and for those who insist on one, there are probably only around 4,500 independent, certified advisers that are worth finding.

The best part of half a million people reaching the age of pension consent (55) this year. The proportion of the population in the “drawdown zone” is in excess of 10m and it will grow as our indigenous nation gets older.

Paul is simply pointing out a market dynamic, if supply is there to meet demand, then the estimated demand for advice is either very low – or there is a massive under-supply.

Advice for all – reduced pensions all round?

The Government has taken a different view. Having given us the freedom to do what we like with our pension pot, they now feel we should be taking advice on how to do it and that it is a worthwhile use of taxpayer’s money to subsidise that advice with tax relief.

They have issued a consultation asking us to confirm the sanity of this madness

The logic is that of the madhouse as is the maths. Here is a worked example.

John has a pension pot of £40,000 with a guaranteed minimum pension of £8,000 per annum.

John takes advice using the Pensions Advice Allowance, also reducing the pension pot to £39,500.

John retires and begins receiving his guaranteed minimum income of £8,000 per year, just as he would have done if he had not used the Pensions Advice Allowance.

This means that the actual value of John’s pension has not decreased.

The FCA rules allow firms to reduce part of the client’s rights under the retail investment product to pay the adviser charge. This means that there is, in principle, no FCA barrier to firms offering the allowance for products with guaranteed features.

Essentially, a firm could pay the adviser £500, as long as the firm is able to reduce the underlying value of the individual’s future benefits accordingly. However, it is administratively difficult to determine what an appropriate reduction to the client’s benefits in exchange for the £500 would be.

The first question is why would John want to pay anyone £500 to be advised he will be getting £8,000 a year in benefit.

The second question is how anyone -even under the most extraordinary benign economic conditions can guarantee £8,000 a year from a £40,000 pot.

The third question is why it is administratively easy to reduce a pot of £40,000 by 1/80th but not a pension of £8,000 a year by 1/80th.

The example is so specious – it calls into question what the purpose of this consultation is.

An obsession with financial empowerment

Of the 40m of us adults fit to drive a car, the vast majority of us hold a licence suggesting we are fit and proper to do so. Only a small number of us understands how a car works.

Around the same proportion of those in retirement know how their pension works.

We do not need lesson in car mechanics to drive a car and we don’t need a financial advisor to receive a pension. However, were we to make the car complicated enough that it was unsafe to drive without additional driving lessons, it could be argued we need a mechanic to teach us how to drive that particular car.

We are building pension strategies that need pension advisers while we are building cars to be driverless. We are obsessed with employing people to solve problems that should not exist. For most people pensions should be like driverless cars, far from needing advice , they should get us from A to B with zero intervention on our part (or anyone else’s).

Building driverless pensions

Of course people will tell you that you can buy an annuity, as if that was a driverless pension. But buying a guarantee of future financial misery is like investing in a car with a siezed up engine. Yes you will be guaranteed that car will never cause any damage- but that’s because the car can’t get you from A to B.

The point of a driverless car is not that it is driverless, it is that it allows people to get on with their lives while travelling from A to B (and it certainly does not mean hiring a chauffeur).

We can build driverless cars and yes we can build adviser less pensions. Infact most people will get a driverless pension from the state. If John, in the example above , wanted to – he could convert his £40,000 and get a little over £1000 a year in extra pension. or he could look for a higher target (without the guarantees). But to do so he would probably have to pay an adviser the £500 a year that the Government consultation is suggesting is a reasonable price for mid-market financial advice.

The economics of the madhouse suggest that any financial advantage in John taking advice, would be eliminated by the cost of the advice. He would be paying a chauffeur to drive his car – hardly within the pocket of the average working person.

The lunacy of our pension system

The FAMR has got caught up in the fallacious logic that has driven the life insurance industry for decades. The assumption is that there will be advisers so the pension products are built complex. The complex products are built but nobody want to pay for the advice. The products become driverless and crash. The Government then recruits an army of financial chauffeurs to keep us all safe.

Paul Lewis didn’t need a thousand words to sum this up.

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and don’t get him started on pension dashboards!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to We don’t need financial chauffeurs- we need driverless pensions.

  1. Mark Meldon says:

    Here’s the thing; I seem to spend more and more of my day as a small IFA in Somerset trying to “prevent” people from making mistakes as far as their pension pot is concerned (I do many other things, but that’s for another day). I frequently meet people, often those I thought I knew quite well, who get the silliest ideas from all sorts of sources.

    A simple example might suffice to explain what I mean. A member of a long-standing DC scheme called me the other day. He’s just a few years off retirement and only has about £100,000 in two DC funds with insurance companies. At the moment he is a higher-rate taxpayer and has been for some years.

    He wanted to “cash-in” his two pension pots as he fancies becoming a private landlord and wanted me to send him the right forms to complete. The property he had in mind was a studio flat selling for £65,000 in not a very nice part of his town with a rental yield of £350 a month. He understood that he could take £25,000 as tax-free cash and realised that he would only end up with a further £45,000 or so from the lump-sum after income tax had been deducted. So, he would go from having £100,000 in a tax-free “account” to having about £70,000 in his pocket after the tax deductions.

    But he only wanted to put down 15% on the property and to borrow the rest, keeping the pension fund proceeds “for a rainy day” in a bank account.

    So he would end up with a highly-geared crummy flat in a crummy part of town just as he enters retirement “as that’s my pension”. I pointed out that one day, but no-one knows when, interest rates might normalise to their long-term average of about 7% as far as borrowing costs are concerned. When I asked him as to whether the flat might attract tenants who could afford a very substantial increase in their rent to cover his mortgage, he did express some doubts. We also discussed the probability of house price adjustment and negative equity.

    He sounded worried “because all pensions are crap” and was concerned about his wife’s long-term financial security. When I asked him a few more questions it emerged that he was in remission from a very serious type of cancer and was mindful that it might return “and finish me off sooner that I had hoped”.

    So, we know that he is very likely to qualify for an underwritten annuity, if he wishes to go down that route and when I explained the “new” pension fund death benefits he sounded mightily relieved. Now, I hope that his life expectancy will be average, and it might well be, but he now understands that his pension fund is a pot of gold, not a smelly pile!

    He and his good lady are coming to see me soon and it might be the case that a further pension contribution is made.

    Talking in my chaps language seems to have worked and my charge for this is zero. I suspect that many IFAs around the UK would act in quite the same way and we don’t need taxpayer subsidies to have such discussions.

    In this case, we will see what transpires, but it is likely that some kind of consolidation of the pension pots would be a good idea and I will agree my fee appropriately.

    There are endless stories like this and they happen every day!


    • Phil Castle says:

      I like Henry’s article and your reply as it is very much similar to the experiences we have with the consumers we deal with. I have under 80 client couples, but having worked promoting group schemes to small employers and their staff between 1998 and about 2007, we have several hundred CUSTOMERS on our books where we were the FIRMs adviser rather than the staff members, but we made sure they knew they could come to us if they needed to and many of them are gradually doing so in their early 50s.
      The example of where an adviser can add value which Mark M shows here is just what we do for these people who have not been able to afford to enagage our individual services before now, but need to now and as a result of entering their group schemes have fairly reasonable benefits which DO need careful consideration with regard exercising pension freedoms as common sense risks going out the window if an adviser is not engaged even though it is invariably unregulated common sense we end up giving them!

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