- We are told that pensions are complex.
- We are told that we need advice to manage our retirement finances.
- We are warned hat we could be scammed if we don’t.
- Is it any wonder that people look at their retirement with financial foreboding?
But pensions do not have to be complicated. Ask a postman and he’ll tell you that a pension is no more than a wage for life, provided for him or her by an employer who organises pre-funding, investment and the payment of the pension.
This simple way of looking at things has met with vitriol. When I explained this to a crowd of Scottish Accountants last week, Maggie Craig, head of the Scottish FCA claimed that I was not “living in the real world”. I don’t know if she thinks that 145,000 postal workers aren’t living in the real world either.
A savings account geared to paying a wage for life should not be complicated. The account itself is simply an invested version of a bank account with an aim of providing more money than could be achieved by saving the money in a piggy-bank.
All the complexities surrounding tax arise from decades of attempts by the rich to avoid paying tax by subverting the simplicity of pension saving. Pensions are now regarded as a means to avoid inheritance tax (non-drawdown), avoiding capital taxes on a business (SSAS) and of hiding company profits (occupational pension schemes). Of course not all pensions are being used for tax-avoidance, but enough have been for HMRC to have built in the labyrinth of rules that prevent the public finances being abused.
It is not the pension that it complicated, it is the abuse of pension saving by the wealthy and their advisers.
Most pensions are paid very simply
Most people get caught up in this complexity for no good reason. The number of people I have met who tell me they want their pension to survive them is very few. People know what inheritable assets are – houses, businesses, chattels etc. – and they know what dies with them.
I have never heard anyone complain that the state pension dies with them. It would seem absurd to us , that the state would pay a pension to our children, just because we have died.
The problem is that we have (and this is partly as a result of the pension freedoms) , started thinking of pensions as “wealth” and not a “wage for life”.
So it is that ICAS could have a two hour discussion on the supposed “crisis in pensions” without mentioning that the vast majority of pension payments are met by the taxpayer on behalf of other taxpayers.
Instead we had to agonise about how we could get engagement with our pension saving, as if that failing to do so, would result in a failing of the system.
Financial gravity will do the trick
If people were not to be bamboozled by the complexities introduced by tax consultants, pension experts and the wealth management “industry”, they would see that managing their pension affairs could be very easy.
If people had easy access to the information surrounding their various pension pots and a simple way of assessing what was good, what was bad and what was indifferent- they could employ “financial gravity”.
Financial gravity is my phrase for thinking about bringing lots of small pots into one big pot. Financial gravity is the process by which the money in the less useful pots is poured into the most useful pot and used to pay a pension. Some call this “aggregation”.
For financial gravity to work, people need to see which pot to pour into which pot.
There are many people who regard this simple idea with the same distaste as they have for a “wage for life” pension. It is offensive to people because it challenges their firmly held belief – not just that pensions are too complex, but that they should remain too complex.
Because these people are obsessed by the idea that they can create value for themselves from that complexity. If things were so simple that people could pay themselves a wage for life by transferring into a CDC scheme, or aggregate all their pots into one big pot, then we would not have the need for the pension industry at all – and that includes a lot of regulators!
Financial gravity tends to simplify over time. Over time, the complexity of our pension system, with its lock-ins and its guarantees and its tax-penalties will be washed away.
This is because, as we get into the later stages of life, all that matters is the rest of your life. Old people closing in on death should not be worrying about death taxes and the exhaustion of their savings or about stock-market volatility, they should be allowed to live their lives to the full -for the remainder of their days. Financial gravity should drain away the complexity and leave them to enjoy what is left.
The utility of simplicity
We all need to simplify our pension affairs over time, because- quite literally – life’s too short.
For the vast majority of people, pensions are way too complex and could do with a spring-clean. Creating simple structures like CDC schemes or even defaults for spending, simplifies matters greatly.
Creating a way to aggregate pots through dashboards and simple metrics that help financial gravity, is within our scope.
By using many of the great platforms and funds already in place, we can do much to get there; what remains to be done, is within our grasp. I feel confident that we will be able to make pensions simpler and easier and therefore more popular and better funded.
If you would like to join with me in this, keep reading these blogs, and I’ll keep writing them.