When asked “have you got a pension”, most people now say yes. That’s because most people (not all) who are in workplace pensions see the amount paid into a savings account as a payroll deduction that says “pension”. There are some who get pensions and some who don’t even know they’ve got one, but most people think of their pension as the thing that clips their income so that they’ll be alright later on.
All the tra-lah-lah about investment strategies, tax-efficiency and investment pathways is for the pension experts, most people just do the equation, “I save so I can spend”.
This apathy is why auto-enrolment has been successful and this apathy could also be the “savings revolution’s” undoing.
Because the amount that comes out of an auto-enrolment pension is no more than a top-up on the real deal, the State Pension.
The economics of advice
Were I to walk into a financial adviser’s office with pension statements totalling £100,000, I – a 58 year old male would expect to find out I could get a guaranteed pension of around £3,500 pa , around £70 pw. I could improve the tax- efficiency of this income by deeming that 25% of it be paid tax-free (under UFPLS) or I might take a 25% cut in the income and bank £25,000 tax-free.
Even after getting this far, I would have probably exhausted my adviser’s patience. To get a recommendation of what I should do, the adviser would have to do the full data capture , working out my net worth (assets and liabilities) , my state of health, my role within my family and most problematic of all “my attitude to risk”.
The provision of a definitive course of action would come after discussing the various options available to me, but one option that should become very clear, very quickly is that there is no magic money tree that can allow me to retire at 58 on anything like a retirement living wage- not from my “pension”.
Any good adviser should , early in the conversation , explain that simply getting to the point where the adviser has to tell you that, will cost him at least £1000 in time and overhead.
The economics of advice mean that an adviser looking to do his job properly will turn to me as a prospective client and tell me that I cannot afford the advice and that the best advice is to find another way.
The other way – hand to mouth
For most people, the services of a qualified financial planner and/or wealth manager are beyond their means.
There are people who execute a financial plan knowing exactly what they are doing. For example, ff they know they want a guaranteed annuity , they can go to a good annuity broker and get fitted up with the right annuity, the cost of which will be paid for from within the annuity rate.
But the people who want to exchange their pension savings for an income for life are a small minority. Most people want the freedom to spend their savings as they want. We know that what most people do is to take from their pension pot what they can – tax-free, and leave the rest till later
At no point do most people start asking questions about investment strategies, or drawdown rates, or life expectancy, or the cost of long-term care, or any of the other issues that people like me write about. Most people are busy doing the day to day equations about how to balance the books and wind down from work and go on holiday and buy the Christmas presents and so on.
This other way is “hand to mouth” and it’s what you get when you don’t do financial planning.
There is a problem with hand to mouth
IFAs aren’t wrong in saying that financial planning is vital. Leaving retirement to your pension pot is not the same as having a financial plan. You will find that even if you have £100,000 in savings, that money will be burned away pretty quick
Charlotte Richards, writing in Money Marketing, tells us that in 2016, 40 per cent of Australians had exhausted their pension savings by age 75, that Americans draw on average 8 per cent each year and manage to make their savings last for 17 years.
Spending your pension savings in 17 years isn’t a problem, so long as you have a plan B. The problem is that if you are doing things hand to mouth, plan B’s amount to Mr Micawber’s “something will turn up” and Mr Micawber ended in debtor’s gaol.
Five home truths about pensions
- The State pension would cost you and your partner around £300,000 each to buy,
- Your pension savings are unlikely to match the state pension and are not your retirement plan
- Unless you have £250,000 or more “liquid”, you’ll be lucky to find a good financial advisor to manage your retirement plan
- Unless you know what you’re doing, you will run out of money in old age
- Currently their is nothing for it but to keep working, keep saving and hope that something you like better than an annuity comes along.
Why I like Charlotte Richards’ article (which you can read here) is that it tells us what we’ve long suspected. That there is no silver-bullet investment solution. She tells me that
The Lang Cat found that more than 70 per cent of adviser firms do not change their investment models to suit clients drawing income in their retirement.
I don’t think this is because advisers are lazy, or stupid but I think this is because they just don’t have to worry about their client’s cashflow planning. Most IFAs deal with the people who are so wealthy, they worry about things like higher rate tax when breaching their lifetime allowance and inheritance tax when they die with too much left over.
The sixth home truth
There is a sixth home truth, which isn’t for ordinary people but for the very clever people in the DWP, Treasury, FCA and tPR.
That truth is that – so far, Government has done nothing to help ordinary people define the ambition of their financial futures when reaching the time when they want to wind down.
For most people hand to mouth future beckons. It’s a future with no certainty of income, beyond their entitlement to the state pension, no retirement plan, no plan to face the uncertainties of failing health. The home truths are that we are currently on our own.
The Government support mechanisms in place (MAPS) are inadequate, the choices from pension freedoms too complex and for most people there is no obvious plan B to “hand to mouth”.
For all the talk of dashboards and financial inclusion, we are really no further to replacing annuities as the default pension mechanism, than we were in 2014 when George Osborne told us we never need buy them again.
Three things we need in the next decade
- We need to free up financial information so that people can create retirement plans with the help of technology.
- We need to loosen the stranglehold on “advice” and encourage people to act on what their data tells them
- We need collective pensions that provide people with a wage in retirement and a degree of certainty in the face of the imponderables of growing really old.