Also absolutely true… https://t.co/9Nk4RbfUWE
— Jennie Kreser (@pensionlawyeruk) July 30, 2019
As Jennie Kreser says, it is undeniably true that the most common way people take money out of their pension pot is by stripping the tax free cash.
Our Retirement Outcomes Review identified that many consumers are focused only on taking their tax-free cash and take the ‘path of least resistance’ when entering drawdown. This can often mean that the rest of their drawn down pension pot is not invested in a way that meets their needs and intentions. FCA 28 Jan 2019
TAX – FREE – CASH; the most delicious words in pensions
Tax- Free – Cash are the three words that mean something to ordinary people. The rest is gobbledegook!
The FCA’s remedy for the problem they have identified is “investment pathways” which take the unadvised and unaware to certain outcomes. The pension providers charged with advertising and delivering these pathways are under instructions to ensure they are designed to help people to good outcomes. But people still have the right not to take the pathways but go their own way.
We are all aware that the further we stroll off designated pathways, the greater the peril (and excitement). Exploiting the opportunities presented by “exploration” are (amongst others) the scammers.
The worry is not so much what happens to the tax free cash – which is money that people feel is theirs, as what happens to the rest of the pension pot – which belongs in some mysterious ways to the pension provider, taxman and often – the adviser. People just don’t see this money as their own.
Which is why people are doing nothing with their pensions
I am convinced that people feel nervous about the part of their pot that is not tax free and find drawdown gobbledygook.
If the investment pathways are a success – it is because they make the mysterious part of the pension pot real to people. I am not sure that they will,
When asked what they want from this money (Aon numbers) 62% describe a pension , a wage for life – an income that lasts as long as they do.
Which is why CDC has value as a simple and effecient destination at the end of a pathway.
Which is why Annuities have value at the end of a pathway
And why a managed drawdown program – has value at the end of the pathway.
All three products make sense – depending on the level of certainty required by the person who’s pot it is.
Doing nothing is not a problem
I am not of the view – held by the FCA – that deferring a decision on drawdown is a problem. I haven’t taken my tax-free cash not because I don’t want to get caught by the MPAA but because I don’t need the money in my bank account.
But I totally understand why people who have struggled with debt throughout their lives will reach out and grab their tax-free-cash. For many people it represents a lifeline to solvency, to others – a financial buffer they have never had before.
Recent research by the FCA suggests that once the tax has been stripped, the residual pot is often switched to cash and left on the shelf. You can see how this happens but they are right – there are better places to put your retirement pot.
But a much worse problem is that this money is a scammer magnet, and this is why I have said again and again that people must resist the temptation to take investment decisions with this money unless they are firmly on-piste.
The three touch rule
One of the things I teach passengers on Lady Lucy is the three touch rule. They should never get on or off the boat unless either two legs and an arm and two arms and a leg are firmly attached to the boat or the land.
The three touch rule applies to pensions too. If you don’t feel grounded – you should not be moving money around. You should do nothing and be patient.
Doing nothing is not a problem, help will arrive. Rushing in to a financial decision you don’t understand is a dangerous thing to do.
I hope that the investment pathways are a success and reduce the reckless conservatism of disinvestment to cash or susceptibility to scams.
But I would rather to see Tax Free Cash stripping than penury.
What we need is to make the use of investment pathways, and – in time – CDC – as popular options as possible. They do not replace annuities or advised drawdown but they compliment them.
They are valuable additions for people following the three touch rule.