Planning for a noble and quick death?

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The wealth management perspective

 

The FT has been doing some research about what motivates people to swap a pension for drawdown. The sample may not have been big but they’re drawing a strange conclusion.

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The superiority of the death benefits within drawdown are primarily to do with their fiscal treatment – the amount of tax payable.

Jo is concerned that fiscal advantage today may not last

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The example given is the former steel worker about whom I have written a recent blog.

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Jo makes her feelings known in that final comment “Didn’t think…”. A similar point is made by our friend Christopher Lean – writing as an IFA

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Two separate issues but one general argument

There are two issues that Jo and Christopher are pointing to.

  1. Whatever the short-term fiscal advantages of drawdown, these are subject to change and cannot be relied on.
  2. The fundamental issue – of insurance against living too long, is addressed by a pension but is not addressed by drawdown.

But the demand for a cash settlement at death (inheritance) rather than a continuing income for a surviving spouse or partner is a key driver in people take money out of pensions. The IFAs know this and advise to the prejudice. I am not condemning IFAs giving people what they want, but I question whether what people want is going to happen.


People want a noble death but often get a slow decline

In her research into attitudes to ageing, Dr Debora Price has found that people are reluctant to think about themselves as dependent in old age. Cogitative impairment (going ga-ga) and physical decline (including the embarrassment of incontinence) are not the kind of things we want to read about, think about or plan for.

Yet these things will be realities for many people and unless there is a plan B, for the possibility that death will not take us nobly and cleanly, the chances are we’ll be ill-prepared.

Here is a photo of two friends of mine, the parents of a college friend, Audrey and JackJOC8

One of these two is much frailer than the other, but because of the support of their daughter, their love for one another and the financial security of  proper pensions, they can travel in a style they could not have dreamed of when children.

Like my friend, I have elderly parents who are declining physically and mentally and like my friend I am incredibly proud and happy when I see them happy. I know that many older people are not happy much, I visit many care homes and have sat in dementia wards.

Beyond these homes and wards are those who sit alone at home with little support and little means to get out and about. There’s is not a noble life.

Like most people still in the middle of life, I am tempted to think of old age in terms of euthanasia; to do what my Grandma did, go happily to bed one night and not wake up.

But for most of us – when we get to later life, the will to survive and fight death will kick in.

What worries me is that we are creating a generation of people retiring now who will have no plans to live long and an exit strategy that says “die young and nobly”.

The financial conflicts comes when someone with a diminishing drawdown pot wishes to spend but is guilty of reducing the inheritance.

Or worse, when the savings put aside run out and it is the house and not the pension that pays for care.

Worse still, when the partner who had the pension and cashed it in, has nothing left to leave the spouse when he dies – no cash – no residual pension.


Does anyone talk about this when “financial planning”?

It is a very tough thing to talk about incontinence and dementia to a 57 year old former steel-worker. It is tough to talk about the consequences of living too long. My colleague Mark is in his late forties and has a gran who is 99, she is in receipt of her husband’s steel-workers pension and very happy to be.

I wonder if this happy scenario will play out with the 57 year old ex-steelworker Jo Cumbo interviewed.

I suspect that there was an element of out of sight – out of mind, about the consequences of not dying nobly. But when there is an elephant in the room, that elephant often creates consequences and not usually good ones.

When occupational pensions were designed, they were not designed to give people inheritable wealth, they were designed as a social insurance against the consequences of living too long. This message has been lost. We now believe that a pension pot of £250,000 makes us wealthy- able to retire- it doesn’t.Joc10.PNG

We need a more realistic approach to later life planning, one that does not pander to our natural aversion to thinking of physical and cogitative decline, of what it’s like to live in an incapacitated state and what part insurance plays in managing the financial risks.

While Jo was concentrating on the fiscal risks of tax-rules changing, she was also touching on the issues raised in this blog, and by Christopher Lean and by Debora Price. I join my name to that list.

The future is not all about yomping on coastal cliffs , leisurely cruises and even lovely days out on the train.

Our futures may and probably will involve an adaption to decreased mobility, mental agility and financial security. We can’t do much about one and two, but we can plan for financial security and I don’t think this current rush to cashing out pensions, is the way to do it.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Planning for a noble and quick death?

  1. Adrian Boulding says:

    It’s high time we designed the sort of pensions people actually want! If DB members want greater inheritability of the very large value of their pension then why shouldn’t the DB scheme offer a choice to trade ? You could swap future increases which are currently very generous for lower increases but better death benefits

    I know DB schemes used to offer continuation benefits for life cover lost on leaving service so this must be actuarially possible.

    We have the same problem in DC with buying an annuity now the third choice behind cashing in and drawdown. Why? Because an annuity is a product designed by HMRC for days when people had no choice.

    Bring on some better products designed by marketing people who actually research what people want to buy!

    Adrian

    Liked by 1 person

    • bobchampion says:

      Adrian,
      An excellent observation. Where are the marketing departments pushing the value of DB pension schemes and analysing how they need to adapt to the needs of their members.
      A reason to transfer that is often cited is that the benefit structure does not meet the needs of an individual member. They have too much income or no family contact for dependants pensions.
      A facility whereby benefits could be mixed and matched combined with a reserve investment account for future use or passing onto dependants may appeal and reduce the need to transfer.

      Liked by 1 person

  2. Mark Meldon says:

    Remember whole life policies? I ask people with “high” CETV’s if they would rather keep the guaranteed income stream and use some of it to pay into a whole life assurance with a guaranteed sum assured of the CETV. Leaving aside the matter of underwriting for now, you can guess what the response usually is!

    So much for “inheritability”!

    The other thing to remember is that the majority of the lucky will have a mixture of DB and DC funds to play around with at retirement – the best of both worlds, perhaps.

    Shame about the whole life policy though – they are fun and rewarding to do!

    Like

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