Do we need to pay to get our money back?

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Imagine going into a bank to withdraw money and being told to get advice before doing so. Imagine being told that the cost of that advice would run to many thousands of pounds. I very much doubt anyone would be prepared to pay the bank’s or an independent adviser to make regular or irregular withdrawals, If I was faced with that bill – I’d exercise my right to close the bank account down and withdraw the lot.

“Withdrawing the lot” is what a lot of people over 55 with drawdown pots are doing. They are doing so because being landed with a socking great advice bill  is what will happen to them  when they ask for their money back. In cashing in their pensions- they are usually donating money unnecessarily to HMRC.

People feel they are facing Hobson’s choice – pay an adviser or pay the taxman – many are choosing the latter. It doesn’t need to be so – people could in future chosse to be paid a pension – that’s what the Royal Mail workforce did.

It’s not just us punters who are getting confused!

This comment posted one of my recent blogs demonstrates how hopelessly mixed up pension experts are becoming over the  freedom of choice.

“You make a separate point about access to advice. This is interesting because one of they key differences between CDC and DC with drawdown is (I thought) the need for advice. The latter gives a lot of choice to the member, including the all-important draw rate and the dependent risk approach. These choices require the involvement of an an adviser (preferably the investment manager itself) in developing collaboratively and iteratively the right definition of the individual utility that the retirement plan must seek to maximise, including any constraints, time preferences and valued optionality. The whole point of CDC is that it proposes to trade off this rich customisation, and its advice requirement, for a collective definition of utility and for a single set of constraints that operate for all. If CDC itself generates a need for advice, that affects the trade off significantly.

It would be interesting to know what advice you think is necessary, at what points it arises and whether this is regulated personal advice requiring a recommendation.

The point of the last question is that we are very much interested in the concept of informing personal selection without making a recommendation. This is currently incompatible with EU regulation which, because of the cost implications, is a key obstacle to supporting personal responsibility economically for all.”

For the record, I don’t see a CDC scheme as generating any need for financial advice, people get paid a pension – simple.

For what is a CDC scheme other than a pension scheme? I’d say that a pension scheme is a way of providing pensions and that a pension is an amount of money paid regularly by the government or a private company to a person who does not work any more because they are too old or have become ill

There are no personal decisions to take about an “all important draw rate”, no “dependent risk approach”, all the things summed up the phrase “rich customisation” aren’t part of a CDC pension scheme – or any pension scheme for that matter. The collective approach is one size fits all and proud of it.

If you want “rich customisation”, I guess you’ve got to pay for it. You’ve got to pay an adviser to tell you how to get your money back – it’s not hard to see why no more than 6% of us are paying advisers to calculate the draw rate under the dependent risk approach.

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Five reasons why advised drawdown cannot work for the mass market.

  1. There aren’t enough advisers – the RDR decimated adviser numbers when it became impossible to make a living flogging commission based products. What was left were about 25,000 advisers who want to get paid to advise – not enough to advise the millions needing help with spending their savings over the next few years
  2. The remaining advisers are typically wealth managers – the last thing that the 25k advisers want is to be advising on draw rates under the dependent risk approach. They want to be managing wealth, typically for the next generation. While most do cash-flow planning – it is typically for the wealthy.
  3. The fixed  cost of advice is prohibitive – the opportunity cost of providing “rich customisation” is enormous, advisers are making big money out of wealth management and pay large regulatory fees , payments to FSCS , software licences and the like – the fixed costs of advice make it a minority sport.
  4. The advisory business model is ad-valorem; to keep costs down, advisers charge your drawdown fund, not you. You pay out of an untaxed fund and the payment’s “VAT free” – the trouble is you need a six figure drawdown pot to pay an adviser’s retainer – the average drawdown pot is around £40,000.
  5. People don’t want advice – they want a pension. This trumps the lot, people do not want to have regular meetings with an adviser (even if they were free) because people want a simple wage in retirement that comes to them every month till they die.

Rich customisation – my arse.

The reason why more than 140,000 postal workers voted 9 to 1 to ditch their individual DC plan in favour of CDC was that they saw their job as coming with a pension. They did not buy rich customisation or the dependent risk approach.  I very much doubt any of those 140,000 postal workers wants to pay for financial advice on how to draw down the money due to them in retirement.

Even if there were advisers to help them, even if the advice was within their means and even if they had built up enough in their pots to enable the adviser to take them on under “ad-valorem”, the postal workers would rather have gone on strike.

The postal workers turned down choice and if they’d been able to understand this sentence- they’d probably have quoted it as the reason why

“These choices require the involvement of an an adviser (preferably the investment manager itself) in developing collaboratively and iteratively the right definition of the individual utility that the retirement plan must seek to maximise, including any constraints, time preferences and valued optionality”.


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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Do we need to pay to get our money back?

  1. Ron Godfrey says:

    Five great points which summarise why there’s a gulf – but there’s more.

    Big firms out there are enticing some, otherwise “pensioners”, out of the simple routes of just taking their income streams because they can do better (and you are “worth” something if you have a medium-size pot of money!!).

    And a significant shift has taken place over a generation.

    “Advisers” used to be salesmen (I say “used to” I think some still are). But the door-to-door man from the Pru, Pearl, Co-op et cetera used to (and I have even heard them say this to their customer) “stitch you up” with the means to boost your pensions from state and private pensions. Even, shock horror, the 10 year savings plans which were dreadful value for money gave people the savings habit and helped them to look after themselves with an encouraging, even if not benevolent, hand. Those door-to-door men and women grew to be the, admittedly “bad”, commissioned-advice-force, and were your “Uncle” (or Aunt) that was so hated of the pre-RDR system. But they were available to all. (And don’t tell me the robots are coming and will replace them.)

    No advisers at the low-middle end of the market and poor advisers encouraging the middle to think they’re rich enough to take risks is what we have left. It’s not pretty. It’s not big. It’s not clever.

    Happy New Year

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