Why you don’t understand your pension


The reason you don’t understand your pension is because it is too complicated

The reason it is too complicated is because it is has too much to do

The reason it has too much to do is because generations of pension experts have designed pension schemes for them – and not for you.


This might sound like a conspiracy theory – it isn’t.

If all we wanted a pension to do would be to replace the income we lost when we wound down (and stopped earning), then pensions could be quite simple. We’d give up something today (income) for something tomorrow (income) and we could call this “deferred consumption” or “saving”.

We could even call it spending on our futures (which is a better formulation as it supposes something positive – which encourages us to sustain the activity.

But deferring income is not what pensions are about. They are now about the freedom to take money as capital and draw from this reservoir of capital to meet major expenses in later life from the pension scheme itself. This has required complex tax rules which treat “cash” and “income” separately.

Now we have extended the job of a pension to providing capital and income for our progeny and other inheritors. The beneficiaries of the pension schemes we find ourselves in now have to worry about the financial implication’s of us not dying before we get to 75!

Pensions have been made to do other jobs, in the eighties and nineties we had pension mortgages where the promise of  future cash was enough for lenders keen to help us onto or up the housing ladder. Pensions have long been part of the business planning of SMEs with the small self administered pension scheme helping owners to buy premises and machinery and proudly  boast not only that their pension is their business, but their business is in their pension.

The complexity of pensions comes from us wanting them to do to much

This complexity is created to meet the needs of various audiences and pension providers have – in catering for these needs – had to rely on advisers to explain what is going on. These advisers need to be paid and pension providers have taken on the job of paying them (on our behalf).

The complexity within the product increases exponentially , to meet the needs of advisers. Not only are products having to meet diverse needs but they have to pay diverse advisers in diverse ways.

These aren’t just financial advisers, there are all kinds of intermediaries who need to be paid – they include lawyers, accountants, custodians and the various parties involved in managing funds.

The management of funds becomes even more complex when the fund manager is employing advisers to organise the delivery of those funds to the public.

The growth of broker managed funds has morphed into the “discretionary managed funds” we know today. Here the asset and fund managers are almost indistinguishable to the owner of the pension rights, both have claims on the pension as do the multiplicity of agents they employ to ensure a secure compliant investment of your money.

We have passively acquiesced to this increasing range of beneficiaries of the money we saved. We are complicit to a degree in the complexity – by not shouting out against the invasion.

We want everything to appear simple, but simplicity is very hard. We have allowed complexity in through the back door by failing to say “no”.

Experts design schemes for them and not you

It may sound trite, but if you allow other people in to manage your pension, you lose control of the original endeavour, the deferment of income, in exchange for what other people say is best for you.

Herein lies the rub. The principal/agent chain can become so complex that no single person – not even your financial adviser, can say they are acting for you. Advisers wear many hats, they are conflicted in many ways – you cannot automatically say they are on your side.

Pension providers are conflicted, like advisers, they are conflicted. The worth of an adviser’s pension book, is like the provider’s book – it is measured in terms of “embedded value” – the income from the various relationships within the book and the “stickiness” of those relationships.

It is in creating “embedded value” for the stakeholders of advisory and product firms, that the complexity of pensions is crystallised. The stickiness is created by disincentivising the owners of all this money from taking the money away and investing it in other – less complex structures.

This can best be achieved by making the contracts that govern pension and fund management so complex, that they are not just sticky – but crystallised! When an accountant sees future income streams crystallise into “certainty”, they can count them as “embedded value”.

This is why experts design schemes for them and not you.

The curse of the back book

Many advisers and providers would like to run pension businesses which are transparent and simple. They’d like people to have a clear idea of what the pension scheme is trying to do and to give their customers clear information on what they’re likely to get from it.

Most would be happy to be benchmarked against their peers so that people could swap providers on merit (as they do banks and utilities).

But advisers and providers cannot always do this. This is because you and your pension have become part of their embedded value, your stickiness is integral to their business proposition, their share price and – at a granular level – their income and pension.

You are – to use their parlance – part of their “back book”, the £400bn of assets under pension management that are in non-workplace pensions and at least as much again – in workplace pensions which might as well be “non-workplace” for all the care employers take of them.

If you are part of the back-book, you may be having difficulty getting help with your pension , you may not understand how it works, who’s taking your money and what you are getting by way of value for it! This is not unusual, it is par for the course (business as usual).

You wanted your pension to do lots of things so it is very complicated, you handed things over to experts and they need you to pay them . You are part of your provider’s and probably your adviser’s back book and they will  do everything they can to keep it that way.

Which is why I am speaking this morning at the IfOA about mapping the pension genome – as part of their transparency session. We have to find a way to break up this back-book crystallisation – dissolve the stickiness and allow people to have their pensions managed for them – and not for pensions experts!


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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7 Responses to Why you don’t understand your pension

  1. Phil Castle says:

    Yep…I agree……………. whatever happend to stakeholder pensions and RU64?

  2. Gerry Flynn says:

    All well and good Henry but none of the above applies to people who are in DB schemes, whether active or deferred and there are millions of them. They to have to put up with “gobbledy gook” in pensions communications.

  3. John Hutton-Attenborough says:

    Once upon a time it was possible to service your own car. Change the oil filter/ spark plugs etc. Now it is almost impossible to change a wheel without calling out the AA (have you got a locking nut screw?). Life is complicated…..

  4. Mark Meldon says:

    For many years now, I have babbled on about ‘back book’ insured pension schemes and the (appalling) neglect they suffer, although I’ll admit that matters have improved slightly in recent years, to give ReAssure and Phoenix Life their due from an administrative point of view. I wish the problem was as simple as saying ‘that old personal pension/executive pension/FSAVC/CIMP/COMP/GPP, etc. isn’t very good, let’s move it to Magnificent Mutual instead as their whizzy plan has everything allowable under the current rules, a great choice of funds and lower charges’

    But it isn’t as simple as that.

    You have to go ‘under the bonnet’ and get to grips with the arcane charging structures as, sometimes, it is better to ‘hold’ rather than ‘fold’. That analysis takes time and effort and that means costs and these expenses might outweigh the advantages of moving a small fund, for instance.

    Whilst this process can be engaging for the plan holder and quite interesting from my point of view as an adviser, it usually isn’t!

    This is a ‘major problem’ and needs to be resolved.

  5. Bob Champion says:

    Henry totally agree with your view. The other complication is that we all have complicated affairs.
    I have today published a blog on LinkedIn “Where is Retirement for Dummies?” https://www.linkedin.com/pulse/where-retirement-dummies-bob-champion/?published=t
    which addresses those complexities and how I am trying to help individuals.

  6. Bob Ward says:

    Complications in pensions will not stop until successive Governments restrict Chancellors from meddling in them for short term gain in return for eventual stealth tax
    Pension Ministers need to be stronger in keeping the Chancellor and Treasury at bay plus putting across their case for proper simplification, especially of legacy plans

  7. Eugen Neagu says:

    I think your blog is a bit unfair on the financial advisors!

    We have not created the complexity, it is the Goverment who every year has a section on pensions in every Financial Act. Sometimes it issues two Financial Acts in the same year.

    With RDR – it is the client decission to pay us or not. They do not have to and some people do not. Research show that people who do not take advice end up with a smaller retirement provision when retiring. There is Hargreaves Landsdowne and other 20 providers offering a do it yourself (DIY) service for someone who would like to plan for retirement, plus the option to use occulational schemes and AVCs options.

    All these options are there. If the clients choose us it is because we offer value. The value is in the financial planning process, the coaching, accountability and holding hands all the way on this journey.

    When writing next time on financial advice, it would be nice to do some research. If you want to come to a client meeting, I could arrange that too.

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