“Savers to be discouraged from raiding pensions” – NS Sherlock

no shit

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.

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.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in CDC, dc pensions, pensions and tagged , , , . Bookmark the permalink.

6 Responses to “Savers to be discouraged from raiding pensions” – NS Sherlock

  1. Dave Thompson says:

    This does not have to be a binary decision, stay invested and take the market investment risk,sequence risk and outliving your income. OR buying an annuity and losing access to pensions freedoms. You can eat your cake and have it to , by doing both , insure your essential spending and keep the rest invested.

    I can’t understand why advisers find the concept difficult to understand , explain to clients or implement?

  2. Dave C says:

    I don’t understand why these are all problems either.

    You’re free to make mistakes or not make mistakes.

    Or as Dave said, a mixture of both.

    Pensions have never been better for those who want control.

  3. John Mather says:

    One of the well meant “protections” for the retail pots effectively restricts investment to bonds, equities and cash. All these struggle with your 4% and inflation at the present time

    Then there is a fixation with liquidity when the best medium and long term investments tend to be illiquid see Lipper timed portfolios.

    For some reason the capital adequacy of the host trust needs to be higher where liquidity is not immediately available. So they avoid good long term investments

    So if you are concerned with long term sustainable returns you cannot do this with the tools given to advisers for retail customers. With low yeilds 40% of the yeild is a hard argument to win.

    We are getting 8% yeilds on property with hope of some capital appreciation and rising income. I have difficulty placing these for a retail customer as I do with leveraged structures, even with AAA counterparties, for the same regulatory reasons.

    In your earlier message you reminisced about 1980’s high charging contracts

    The reality is that for the majority nothing happens until someone sells. It is no comfort that high charges are avoided by doing nothing.

    Charges within the product are the only way many clients can pay a viable fee we just need to sort out what is reasonable and viable

    Keep up the good work

  4. Dave Thompson says:

    Most of the BSPS steelworkers, that have had no previous investment experience, would have opted for “a wage for life” in retirement if offered it after paying off mortgage and maybe changing the car. A number that I have met think their drawdown income is guaranteed.

  5. Iain PW says:

    Drawdown guidelines should be established with each client well in advance of any withdarwals starting. If the client goes off piste thena ll bets are off. Abraham Okusanya’s Timeline App is excellent startng point for sustainable withdrawal rates. The app uses 117 years of historical market data and ONS cohort longevity projections. You can also incorporate the Kitces’ ratcheting rule (less common) and the Guyton-Klinger (GK) withdrawal rate rules (capital preservation, prosperity and inflation rules all can work – but how many FA amnd FAs know about these and can exploian them to their clients?). Abraham’s own blog and research (he is an actuary after all) is well worth a read. https://finalytiq.co.uk/blog/ For example, targeting income withdarwals from bond funds in a Bear market is a proven strategy (not that you can do that where 1 just fund has been used in the asset allocation mind you – but who would EVER invest like that anyway?)
    Bergen’s ‘safe’ withdrawal rate of 4% has been superceede as there are so many other variables now to consider.
    Not agreeing the guidleines and rules of drawdown in avance with the client is a sure fire way for them to run out of money in retirement and for the adviser to get sued. Too little thought goes into the end game.

  6. Iain PW says:

    sorry for the typos

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