Apparantly DC pension providers are considering giving pension savers guidelines as they start drawing down money so they don’t run out of money. (Daily Telegraph- savers to be discouraged from raiding pensions). Presumably a responsible pension provider would also encourage those drawing down a bit slow of the risk of not having a life as they get old.
The move comes as the FCA prepared to review the drawdown market in April. To date the only coherent advice I’ve had on how to drawdown my pot is from Adrian Boulding (wrongly described by the Telegraph as current char of PQM). Adrian “advised” me of the 4% rule of thumb – which would allow me to solve the hardest, nastiest problem in finance with the calculator on my phone.
Of course Adrian was tongue in cheek and of course managing a drawdown takes an adviser, well it does if you work for Royal London.
Advisers (with help from providers) can advise on drawdown because they see full circs, but how could individual firm give this advice / info on a single pot in isolation? https://t.co/eL0B0i4IWt
— Steve Webb (@stevewebb1) February 11, 2018
Steve asks a rhetorical question (one which he knows the answer to). Steve – the author of the Defined ambition of Pensions Act 2015, knows that single firms can give advice to all the people in a collective DC arrangement by pooling their life expectancy and their assets and paying them a pension based on mutuality.
Mutuality is of course what Royal London believes in, so Steve is struggling a bit not to agree with me! I won’t tweak his tail any further as I would never want the author of the pension freedoms to be seen on the side of collective pensions!
What will the FCA conclude when they look at drawdown in April?
I suspect , judging on experience in countries more reliant on DC pensions than the UK, with mature DC systems than ours, that most people struggle to manage the hardest nastiest problem in economics themselves, and that most advisers can’t help them very much – other than to advise them of the consequences of the decisions their clients have just taken.
If you had decided to buy a car from your pension pot and drawn down £10,000 in one go half way through January, you would have found yourself depleting your drawdown by considerably less than if you’d cashed out 10k about now (Feb 11). We cannot account for the vagaries of a stock market that decides to shed 10% of its value in a couple of weeks because of “sentiment”. We should not try to catch a falling knife.
But could an adviser foreseen the timing and incidence of the stock market fall – any better than their client? I very much doubt it. I think that advisers are good most of the time like I think absolute return funds are good most of the time. The test of a food adviser (and an absolute return fund) is to manage the tough times – as we’ve been having. And before John Mather leaps to comment, I think the best advisers are brilliant in managing retirement cash-flows and will be worth every penny you pay them.
However, they are not able to predict crashes or corrections and will tell you that if you are using your pension pot for major capital expenses (buying cars and houses etc) you are running big market-timing risks.
What the big pension fund providers who offer drawdown should be saying to non-advised clients is this.
25% of your pension pot can be taken as cash and if you want to use this for big cash items like cars and kids house deposits, then take the money and put it in a cash ISA or a bank account and do not rely on the stock market for this money.
The rest of your pension pot is designed to pay you a pension (that’s why you got the tax-relief on the contributions that built it up and why you get tax-free growth (nearly) on the money in your pot today. If you want certainty on this money, buy an annuity, if you don’t – then invest. But if you take the risk of investing on your own, then you run the risk of ruin – and if you don’t have the appetite to lose some of your money, then don’t invest. If you want someone to help you, take an adviser, but don’t think that by having an adviser, you are guaranteeing you will be alright.
Now if that is what the providers are going to tell their customers, I would be perfectly happy, because that is what I believe to be the case. If anyone disagrees with me, they are welcome to say so in the comments box below.
Now for those people who read the above explanation who don’t want an adviser and don’t want an annuity and aren’t happy with the prospect (however remote) of their money running out, I would propose another paragraph.
If you are not happy with the above, I suggest you wait a bit and investigate transferring your pension pot into a CDC scheme. These schemes don’t exist yet, though the Government promised you could have one in 2015. However, it now looks as if they are likely to come along reasonably soon. When they do come along, they will be addressing the problems you currently have.
For the moment you have our sympathy, you are faced with the hardest, nastiest problem in finance, and there’s not much that anyone can do for you.