Why should we have to “engage” with our pension?

engagement 1

Someone else’s idea of fun!

I am on the same page as Charlotte Clark of the DWP, I don’t think we should be asking people to engage with our pension, state – occupational or private.

Saving for our retirement needs our attention but when we’ve got to the point when it starts paying us back – shouldn’t we be entitled to relax and let the money flow?

I found myself in the frustrating position last week, of having to listen to debates on “sustainable rates of withdrawal” which typically culminated in an emphasis on the need for regular meetings between an adviser and his/her client.

Quite apart from the cost in terms of advisory time, I really wonder if this is what I want to do with my later years. Charlotte and I are on that same page. And as we all know, our capacity to “engage” in the sustainability of withdrawals will only decrease over time.

This is why I love this tweet

Pensions should not be a struggle

Reading the PPI’s Evolving Retirement Incomes report is very difficult. There is no pretence – pensions are and should be hard work.

Rather than make products easy, the PPI demand that people face up to the complexities of managing their money in later life. Backed by sponsored by the Association of British Insurers (ABI), AXA Investment Managers, Department for Work and Pensions (DWP), Legal and General (L&G), NEST, Prudential, The Pensions Regulator (TPR) and Wealth at Work, this appears the industry view.

Chapter 2 of the paper sets us an exam question

“How can individuals achieve positive retirement outcomes within the existing landscape?”

The answer is no easier than the question

Decisions about how to access pension savings in order to fund retirement are particularly complex since the introduction of pension freedoms. Many individuals struggle to understand financial fundamentals such as tax, probabilities and inflation risks or how investments and retirement income products work. Individuals also often struggle to understand charges, risks and value for money.

Many people have not given much consideration to how they will access their pension savings in order to fund their retirement. Even among people who have already accessed their DC pot, understanding of the decisions they have made is relatively low. As the average level of DC savings among those reaching retirement increases, the impact of decisions made about access will grow in significance alongside the potential for harm if people make decisions which have a negative impact on their financial wellbeing.

Therefore, the need for support through advice and guidance will grow over the next ten to fifteen years and beyond.

Pensioners are born free but everywhere they are in chains

To me it is entirely unacceptable to sell people the idea of freedom from annuities but to offer them no viable alternative but a lifetime of thraldom to financial advice.

The PPI report suggests that automation may bring down the cost of advice but offers no hope that individuals will be free of the need of it. The FCA’s idea for default investment pathways is met with a similarly dismal response.ppi sad

The level of ambition is startling low. We are reduced to speculating on possible cost reductions over time and protecting people from the “worst outcomes”.

The idea that anyone is wanting to engage with pensions on this basis is awkward. Far from offering pension freedoms , we seem to be in a kind of aimless limbo.

If there is to be progress, it will not be to make life easier for the pensioner.

Innovations in communications and support could increase levels of engagement prior to retirement and improve retirement outcomes

The pensioner will have to work for their “retirement outcomes”.

On this blog over the past ten years I have tried to introduce the ideas of a Pension PlayPen, of Sunny Uplands and of Popcorn Pensions. I want people to be released from financial strain in later life. It was never in the plan for people to have it increase levels of financial engagement prior or in retirement.

We need something different than this

We know from the FCA themselves that 94% of us do not go to visit an IFA on a regular basis (if at all). The PPI is expecting this to change but this seems unlikely. The IFAs I meet are at a comfortable capacity and don’t seem too keen to be taking on new clients (unless they are substantially rich). There are not a lot of young financial advisors.

The cost of advice for those who haven’t substantial assets against which advisory charges can be set – is prohibitively high for most people. Consequently most people will need non-advised solutions.

Reading the PPI report , there seems to be little scope for product innovation. But those of us who remember back to the eighties know that there are alternatives to guaranteed pensions. There are non-guaranteed pensions and these can be paid from DC pensions. We call them CDC pensions.

You do not have to engage with your CDC pension , you can get on with your life confident that you are getting a wage for the rest of your life. Doesn’t that sound rather more appealing than the alternatives outlined above?

al and Henry

It should be this good

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in actuaries, advice gap, CDC, pensions. Bookmark the permalink.

4 Responses to Why should we have to “engage” with our pension?

  1. Simon Apperley says:

    Henry, I haven’t been following you for 10 years, so maybe catching up here – but what strikes me as a late 40’s person with a DC savings plan is that there is a market failure in the finance industry. The main reason I am looking at a (probabilistic based IFA supported) drawdown arrangement rather than annuity is perceived value for money. I want an income for life which I believe to be the best I can get. From what I can tell, annuities are a good idea, but as the insurers backing them want to have very low risk, they base them on very conservative returns. The SWR route seems to offer a far better return for my sweat and toil in accumulation. I am open to new financial products for decumulation, though the market seems polarized in to either zero risk (to the finance firms) annuities, or leaving Joe Public to sort themselves out. In a working market the finance industry should be trying to provide novel solutions, not bullying people in to a take it or leave it low value for money annuity. I therefore like the idea of CDC, but haven’t a clue whether it’s something that must be used in accumulation and decumulation like an old DB, or if the industry would allow people like me to ‘buy in’.

  2. Jasper says:

    I agree. I retired at 57 and spend a solid year reading up on pensions before I did anything, living off capital for year. I am now in income draw down with a low cost platform. I took financial advice from a FA at the start but chose not to follow it as, had I done, it would have entailed paying 1.9% annual charges. Having found a low cost platform I can enjoy my dubious “freedoms” – for example isn’t it fun worrying whether your investments match your risk profile? And what is a risk profile anyway? A certain level of bonds can protect against market drops in the short term but will they expose you to a longer term risk of running out of money? Am I taking out more (or less!) than the maximum sustainable withdrawal rate? Is there a great depression round the corner? Will annuity rates ever make become attractive again? What effect will Brexit have on my pension portfolio? Interestingly, in my year of reading up on pensions (and I had been a chartered accountant in my working days) I never came across the concept of a collective defined contribution scheme till coming across your blog recently- if it works in The Netherlands (I understand it does) then why not here?

  3. henry tapper says:

    Thanks Jasper – if you read my blogs today, you will have access to the Work and Pension Select’s excellent report or you can go there directly https://publications.parliament.uk/pa/cm201719/cmselect/cmworpen/580/58012.htm

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