Should DC investment strategy be driven by pot size?

The FCA’s latest market data was published last week and it’s highlighted trends that I’ve been identifying on this blog for a few months.

  • Just over 645,000 pension plans were accessed to buy an annuity, move into drawdown or take a first cash withdrawal in 2018/19.
  • 4 in 10 of all the pension pots accessed had a value of less than £10,000.
  • Over 350,000 pension pots were fully withdrawn at the first time of access; 90% of which were less than £30,000 in value.
  • 48% of plans were accessed without regulated advice or guidance being taken by the plan holder. 37% of plans were accessed by plan holders who took regulated advice and 15% by plan holders who did not take advice but received Pension Wise guidance.
  • 40% of regular withdrawals were withdrawn at an annual rate of 8% or more of the pot value.
  • Pension providers covered by our data return received 57,000 defined benefit (DB) to defined contribution (DC) pension transfers.

These are the highlights but there will be great interest is in the detail.

Look at those big blue lines – they represent people cashing out  8% or more of their plans. In practice this is not pension planning but short-term cashflow management since this level of income is unlikely to be sustainable for life.

It confirms that for most small savings pots, the conventional investment strategy known as life styling is unsuitable, perhaps we should accept the conclusion of the graph, that it is only when pots are larger than £100,000 that the majority of people try converting “pots to pension”.

How long before lifestyle designs are driven by pot size?

Screenshot 2019-09-28 at 06.37.47

Even more importantly – with investment pathways less than six months from introduction, shouldn’t we be recognising that advice is also driven by pot size.

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I am not convinced by the bar chart above, especially with regards the impact of Pensions Wise – which appears inflated. I’m also unsure how the annuity market is analysed. In my experience, most annuities aren’t bought with advice but the expertise available from annuity brokers make these purchases “informed”.  Compared to the “fully withdrawn” box, I suspect that those purchasing annuities are making informed choices which while not “advised” are likely to be less problematic.

A much better correlation between pot and the take up of advice can be garnered from this chart

Screenshot 2019-09-28 at 06.57.46

If we take drawdown as a proxy for “advised”, we can see that advice becomes popular only when there is sufficient money in the pot to warrant of pay for it. As we know, most advisers are suffeciently busy to focus on “wealth”, normally associated with assets of more than £250,000, while pension wealth can be spread over several pots, it’s clear that pension (as opposed to cashflow) management , is the privildge of the better off.

The FCA are surely right to look at investment decision making through two key lens’.

The first is the lens of decisions taken

Screenshot 2019-09-28 at 07.07.28

The vast majority of pots are being cashed out because they are not being considered pensionable. This is the social issues


The second relates to the value of assets which go from pots into their various buckets.

Screenshot 2019-09-28 at 07.05.40

By contrast – economic consideration would suggest that drawdown is the most relevant of the investment strategies.

The socio-economic argument may be to focus investment pathways on cashflow strategies (eg meeting immediate financial needs) for  those on low incomes (encouraging sound financial management). For those with larger pots, the pension strategies of drawdown , annuities and UFPLS are most relevant.

I suspect such a blatant segmentation around savings levels will be considered discriminatory but I would regards it as realistic. The FCA have landed on the key metric.


Pot size may well be the best determinant of investment strategy

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Should DC investment strategy be driven by pot size?

  1. Eugen N says:

    It should. Personally, I do not think that a non-advised solution would get much traction.

    I would think people would continue to encash small pots, due to need of money pre State pension age, and purchases of LEVEL pension annuities would continue to some extent.

    Level pension annuities are not an optimal solution because there is no inflation proofing. We can only hope for the sanity of million of people who have one, that inflation as measured by RPI will remain under 3% – 3.5% per annum. It should, unless there is a mistake in monetary policy and fiscal policy, for example a Labour Government too generous with helicopter money (hand-outs). Helicopter money is good, but it needs to be used with care.

  2. John Mather says:

    I would like to see a table for different dates of deaths for an IRR calculations at 65 for an RPI linked annuity at 65 (spouse10 years younger) it takes 33 years before the original capital is returned (gross) and only a 25% chance of one of the couple reaching 98 So in what circumstance is the annuity good investment value?

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