The number of pension providers who’ve paid to join the Government’s pension dashboard initiative has risen to 17. The initial pilot will be more complete because legacy pension providers like Phoenix have joined the hard core who offer new pensions either as SIPPs or workplace pensions.
Am I alone in seeing this as a project in search of a strategy?
A couple of years ago, I listed all my pension pots and divided them into three; those I could merge, those I could leave where they were and those which might be merged in the future if the promised ban on exit penalties came into effect. My DB rights are remaining untouched (a big decision with transfer values so tempting, most of my pension pots are in one big pot and the rest (with Allied Dunbar) is awaiting “release”. I can see my pension pot at any time thanks to the Legal and General workplace pension portal and I know my defined benefit pension rights from correspondence with my trustees and from the Government Gateway which gives me access to my state pension rights (still 12 years away).
I am someone who, in the teeth of opposition from insurers intent on my using the services of an IFA, has sorted a pension pathway for myself. I doubt there are many like me – with the energy , experience and confidence to press the necessary buttons.
The Government’s Pension Dashboard initiative is designed to make it easier for people to do what I did and manage their pension affairs using a single digital ledger.
All dressed up and nowhere to go
But what happens when you can see all your retirement wealth on a single screen? Does it empower you to manage your affairs any better? There are some excellent financial modelling tools which, once you’ve scraped the information together, tell you- based on various assumptions, what you can draw as a pension with degrees of certainty that your money won’t run out.
But these models are hypothetical, they do not take into account the actual costs of turning a pension pot into a pension (unless that pension is guaranteed as an annuity). The options available to people to organise their later life income are still very basic.
- create income from work
- take pension from defined benefits
- drawdown capital
- convert capital to guaranteed income
- rely on state pension and benefits
A dashboard may help you to organise the phasing of these options, but it will not magic money where no money is available nor will it help solve the most intractable problem of converting capital into income.
One of the key strategies employed by many defined benefit schemes is “de-risking” which typically means persuading people to convert income into capital. It is a lot easier to visualise £100,000 than £3,000 pa inflation linked for the rest of your life. So it is easy for defined benefit schemes to pass the capital sum across and leave the income problem to the person with the capital.
The pension dashboard will allow people to see their pension capital but will these dashboards help to make the money last? The cost of replacing half the income of an average person retiring at 60 is around £400,000 (single person increasing annuity (3%) offering £13,500 pa).
Frankly most people are not going to get near to saving that kind of pension pot. They simply will not have the luxury of a guaranteed lifetime income. Nor will they have the means to drawdown their capital in stages without considerable worry. Just the political events of the past 18 months including the Scottish referendum, the General Election, the Brexit vote and now the rise of Trump, have provided uncertainty to bond , equity and property markets.
Every drawdown is subject to the particular market risks associated with these “shocks”. Anyone relying on drawdown needs now to be aware that unless they convert to a risk-free asset allocation, they are chancing it. And if they move to a risk free strategy, they are little better off than buying an annuity.
The two major initiatives (other than the pension dashboard) to make life easier for those who are drawing or planning to drawdown income have both ended in failure.
Last month, the Government abandoned plans for a secondary annuity market which could have enabled people locked into inappropriate annuity, to switch to capital drawdown.
Over a year ago, the Government mothballed work being done to create alternatives to annuities and drawdown, specifically the setting up of collective drawdown arrangements which might have reduced the risks people take of living too long or getting blitzed by unfortunate timing of drawdown.
To me, these plans, were of considerable greater importance to those retiring in the next few years with capital and to those in retirement with insufficient income. I am very pleased to hear that the current Pension Minister has – instead of closing doors- started opening them.
There is an opportunity for us to revisit the Defined Ambition agenda and ask whether the current polarised choices of annuity and drawdown properly meet the needs of ordinary people.
There may be some who argue that the pension dashboard is a step in that direction and I don’t want to discourage the work that is being done to provide the portal on our wealth.
But I would not like people thinking that giving people a view of their money (or the lack of it) – will – in itself – solve anything.
To have a retirement strategy based on pension freedoms, we need better products. Those products need to include collective solutions for the ordinary saver – as well as the existing options we have today.