The FCA are consulting on the £400bn of pension assets that are not in workplace pensions. Implicit in the consultation is a desire to help those who depend on them in retirement to maximise these savings.
The savings are of questionable value; some are invested in the wrong funds, some are subject to extortionate charges and most have no obvious means of release as a wage for life or “pension”.
Assessing the value from their current management, the cost of that management and arranging a viable default means to spend these savings – should be the primary priority of the FCA.
Fortunately, it looks as if we may be able to do all three, if not tomorrow – at least in time for some people to get a better deal. Doing nothing is not an option, we have the means to clean up the legacy ; help is at hand. Let’s look at these three issues separately and return at the end of this blog to the holistic solution which people with such savings need.
Mixed in with a lot of filth, there are some pearls. Genuinely good with profits contracts with guaranteed annuity rates, policies which carry good quality death benefits, some waivers of premium which are currently allowing accumulation to be insurance company funded.
And there are some very special self-invested personal pensions which are enabling the financially capable, or those with financially astute advisers, to manage their financial affairs within pension wrappers – with precision and acuity. John Mather and others – PACE!
There is also a lot of very good passively managed money, run within new style personal pensions, technically SIPPS, but for practical purposes, fulfilling the original intention of the stakeholder pensions. All of the above offer value, and I have no issue with these plans as a means of accumulating the capital to pay a retirement income.
But – and you knew there would be a “but”, there is one heck of a lot of filth.
- Investments that made sense at the time but which have been taken over by changing economic circumstances (low interest rates for instance)]
- Management that proved a flash in the pan – funds which now languish in the back office
- Funds which were too big to succeed – the closet trackers
We all know the names of the providers – Allied Dunbar, Abbey Life, Crown Life etc.. but who remembers those top performing managers – the sexy Japanese warrant funds, the sophisticated broker managers that we gladly put our trust in? All offered value – most failed to deliver and few are accountable.
The money we have paid to providers for the investment of our savings has – in many cases been eye watering. I have recently transferred an investment of many thousand pounds made in the mid eighties, at the value of the contributions – no more. I was promised equity returns, if i had got them , my fund would have been worth four times what I contributed. For no reason other than charges, I got a quarter of what a simple investment in a tracker would have delivered.
All the arguments about tax free cash, tax free growth and tax relief on contributions pale into insignificance against the carnage created by
- Capital/Initial units
- Accumulation units
- Periodic contract management charges
- Non-allocation periods
- Bid/offer spreads
- Dilution levies
- 90/10 with profits charging structures
- Transaction costs within funds
- Operational costs in switching (especially automated switch programs)
- Paid up penalties
- Exit penalties
The complex charging structures designed by private pension providers were designed to be fair. They shafted everyone.
If you tried to get out of a contract you were shafted by exit penalties
If you stayed in , you were shafted by the various initial and accumulation charges on the fund.
Thankfully, the 1% cap on exit penalties which has come in since 2016, means that those 55 or over, can at last get some relief from the incessant value destruction caused by the money we have had to pay.
However, the facts are , most 55 year olds don’t know what they are paying and don’t know there is any better.
The pension at the end of the tunnel?
The harsh truth is that there is no pension at the end of the tunnel, only an annuity or the freedom to go and spend your money as you choose.
That may sound inviting to those with little understanding of what it’s like to be alive and have no work, but it’s not much comfort if you are at the end of your working life and at the beginning of a long period when you’ll be on holiday on £8,500 a year.
When the tax-free cash runs out, there is a drawdown to come. But that draw-down is unlikely to provide a wage for life. Ordinary people who had expected a pension , are being delivered the hardest, nastiest problem in economics, dressed up as “pension freedom”.
There is no pension at the end of the tunnel.
Poor value – lost money and no light at the end of the tunnel.
That’s how legacy pensions are turning out for those who bought into Mrs Thatcher’s personal empowerment dream in the eighties and nineties. Things improved after the arrival of stakeholder pensions but even today, consumer protections are too weak and millions are being squandered daily on ridiculous self-invested strategies which look remarkably like the broker managed funds we thought we’d left behind twenty five years ago.
What we have not yet devised, is a means to look at what we have purchased and assess whether it gives us a value for money pension offering. The means to look at value and money pensions simply doesn’t exist.
It is not possible to type in your personal pension policy number and have a machine tell you
- what value it has given you and what value is yet to come
- what you have paid for it and what you have still to pay
- The pension you are likely to get from your savings.
Could we build a machine to tell us the answers?
Yes we could. It would be a pension dashboard which had real purpose. A dashboard which had a diagnostic light for each legacy pension that you typed in.
Red light flashing – this pension is rubbish and you could and should get out now
Amber light flashing– this pension is rubbish but its questionable whether you should get out now
Green light flashing – this pension is alright and worth hanging on to.
Would that be advice? Yes i think it would, it would be a machine that would have had to have been kicked around in the FCA’s sandbox. The risk would be with the programmers and maintenance managers of the machine
Would that be guidance? Yes I think it would, it would be a machine that employers and other could promote without fear that they would be deemed “advisers”.
Would that be helpful? If you were able to tip in your pension legacy as easily as your old coins into the Magic Money Machine at Metro Bank
Not only does the technology exist, the Regulatory will is there as well.
We’ve had the technology to analyse funds, pension contracts and to deliver pensions from pots for some time. Until now, we did not have the Regulatory will to do anything with it.
Now, we have in the FCA and tPR, two regulators who seem to want to work together to ensure we can compare good with bad, whether it is in the workplace or not.
We finally have some kind of pension offering, emerging out of the fog created by pension freedom.
Before too long, we might have a way of comparing the retirement annuity contract I took out in 1984 with the SIPP I set up in 2014, the money in my trust based occupational scheme I joined in 1995 with the workplace pension I joined in 2012.
My hope is that ordinary people can – without having to consult with anything but a machine, be in a position to see what they have by way of value, what they are paying for it and a default option they have for this money in retirement.
They can then make easy choices based on clear information that might include employing an adviser.
If we could offer people the retirement equivalent of Metro Bank’s Magic Money Machine, then we’d have a pension dashboard worth talking about.