For you, my friend, drawdown is over- the chimera of freedom

This article is about collective pensions, it’s not technical, anyone can read it and – I hope- enjoy it. I wrote it after discussing pensions with my landlady at my Munich hotel.


My friend Abraham has it in a nutshell. If you think you can solve the nastiest, hardest problem in finance on your own, you should think again.

He is right, if you want your income to last as long as you do , you should read Abraham’s book

It’s been three years in the making.

Today, I’m beyond excited to tell you that my new book ‘Beyond The 4% Rule: The science of retirement portfolios that last a lifetime’ is now out.

 

It's been three years in the making.

Today, I'm beyond excited to tell you that my new book ‘Beyond The 4% Rule: The science of retirement portfolios that last a lifetime’ is now out.

Amazon: https://t.co/HIubZtKK9A

Download first chapter free: https://t.co/dtAcbGNebm pic.twitter.com/Qn42yOl99e

— Abraham Okusanya (@AbrahamOnMoney) March 9, 2018
 

Abraham will show you why trying to provide yourself with a lifetime income from your pension pot will drive you to a financial adviser and ultimately – drive you nuts!

As I’m not a commission – I will now give an alternative view.


The alternative to doing it on your own

Most of our retirement income is not self-planned. For most of us, our income still comes mainly from the State , a munificent standing behind a DB promise or from the PPF. In all three cases, the solutions is collective, the insurance based on a large pool of people of which we are only one.

That this is the case is neither accidental or wrong. Social security requires society to act as one. Those who opt-out of society must accept Dylan’s truism that “to live outside the law you must be honest”. Honestly, most of us do not have the kind of honesty that Dylan is talking about, we still need roads, hospitals, schools and yes – pensions.

The case for collective pensions is written into our DNA, the concept of individual drawdown is not.

The alternative to doing it on your own is doing it together;  the alternative to drawdown – in a world where employer guarantees are restricted to contributions , is collective defined contribution (CDC).


 I am in Munich (the European perspective)

I am enjoying the hospitality of the Bavarians, as Stella and I make our way down to Italy by train. The Germans are moving towards a system of Collective Defined Contribution pensions. The lady at the Laimer Hof hotel and I have just had a good discussion (in English) about this.

She mentioned how frightened she was of growing old without financial self-sufficiency (her very words) and explained how she wanted her savings paid to her  by an expert so she didn’t have to worry about them running out. We didn’t talk about the mechanics of the proposals being put to the German people, we talked in simple terms about human needs.

For most people, the worry about living too long is confined to inheritable wealth. To put it frankly, we worry that our parents will outlive their savings and become a burden on us. By the time we get to be in their position, we will be dead  (the average Brit underestimates their mortality by 7 years).

I don’t suppose their is really a lot between the average Brit, or Dutch or German citizen. The more I travel around Europe, the more I am convinced that no-one wants to be left with the hardest nastiest problem in finance as they lose their faculties. Nor do we want to be a burden on our families.


Sorry for the lack of economic analysis but…

This blog is full of good sense on CDC (just search Con Keating). There are blogs here on how we manage CDC risk, CDC investment, CDC administration and most of all – people’s expectations of what CDC can offer them.

But what’s missing from this blog, and hopefully this blog goes some way to meeting this need, is a simple statement of the problem.

The problem is defined by Abraham. Either we go it alone, with the almost certain chance of screwing it up, or we trust in an adviser (with the slightly less certain chance of the adviser screwing it up. Either way, the further you go beyond the 4% rule – the tougher individual drawdown looks. That is the problem.

You may (and John Ralfe probably will) tell me that the problem can be solved by buying an annuity from an insurance company. But that’s like telling someone to live in a tent for the rest of their life. You may have security of tent-ure, but it won’t be much of a life.

So we end up wanting a little bit more ambition than an annuity supplies us with, but less risk than outlined by Abraham, WE come back to the old idea of doing things together, the simple solution of my landlady at the Laimer Hof Hotel.

“We’re better off together”

 

About henry tapper

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

2 Responses to For you, my friend, drawdown is over- the chimera of freedom

  1. Robert says:

    “32 % of retirees who have chosen drawdown have no investment experience and 41% have not received either financial advice or guidance about drawdown”.

    For those that are in a workplace pension e.g. the Tata Steel UK PRSP Aviva DC scheme, would the need for financial advice or guidance about drawdown be diminished? This is due to the fact that Aviva has a default guided pathway (the Aviva Drawdown Lifestage Approach) so in effect the plan even has its own financial adviser. The guided pathway is effectively a free feature that cuts out the need for a middleman.

    This ‘Approach’ works as follows:

    The Aviva Future Focus 2 Drawdown Lifestage Approach Fund is a low involvement investment (annual management charge of 0.26%) where Aviva make most of the investment decisions so you don’t have to. This is ideal if you don’t want to spend much time managing your investments. The current default fund is the Aviva Pension Diversified Assets Fund II S6 (medium risk) and from 10 years to your chosen retirement date your money is gradually moved into a low to medium risk fund which is the Aviva Diversified Assets Fund I which aims to help minimise fluctuations in the value of your pension pot. From 3 years to your chosen retirement age some of your money is gradually moved into the low risk Aviva Deposit Fund which aims to protect a small portion of your pension pot that can be taken tax free.

    Like

  2. Robert says:

    Updated comment in relation to:
    “Get your a** to a financial planner, now!
    32% of retirees who have chosen drawdown have no investment experience
    41% have not received either financial advice or guidance about drawdown
    10% said they relied on Google to figure out how drawdown works”

    For those that are in a workplace pension e.g. the Tata Steel UK PRSP Aviva DC scheme, would the need for financial advice or guidance about drawdown be diminished if you stick to your chosen retirement date? This is due to the fact that Aviva has a default guided pathway (the Future Focus 2 Drawdown Lifestage Approach) so in effect the plan has its own financial adviser. The guided pathway is effectively a free feature that cuts out the need for a middleman.

    It works as follows:

    The Aviva Future Focus 2 Drawdown Lifestage Approach is a low involvement option where Aviva make most of the investment decisions so you don’t have to. This is ideal if you don’t want to spend much time managing your investments. The current default fund is the Aviva Pension Diversified Assets Fund II S6 (medium risk) which has an annual management charge of 0.26% and from 10 years to your chosen retirement date your money is gradually moved into a low to medium risk fund which is the Aviva Diversified Assets Fund I which aims to help minimise fluctuations in the value of your pension pot. From 3 years to your chosen retirement age some of your money is gradually moved into the low risk Aviva Deposit Fund which aims to protect a small portion of your pension pot that can be taken tax free.

    Like

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