Listening to Victoria Derbyshire talking about domestic abuse on the radio this morning , I was struck by one insight. When asked why domestic abuse had been such a low priority at the start of lockdown she observed that as the Cabinet was mainly comprised of liberal males the plight of oppressed women locked into domestic violence wasn’t considered.
What we don’t consider often matters more than what we do. Thoughtlessness is as common as mindfulness and I find thoughtlessness particularly frustrating when dealing with financial advice.
Thanks to everyone who voted. Surprised that 65% of people got it wrong ! pic.twitter.com/UHO78w0ck9
— David Penney (@DavidPenneyPRW) August 19, 2020
Quoting his tweet is not in criticism of David Penney, who is a very good and conscientious financial adviser whose clients are lucky to work with him. The tweet shows David’s strength but also the weakness of the advisory system for whom right and wrong answers are focused on the accumulation of wealth.
Almost all the expert comment that followed confirmed that David was right and that higher rate tax -payers would be wrong to save into a pension if they didn’t get higher rate tax-relief.
But equally , higher rate tax-payers are likely to get the best out of pensions because they tend to live longer than the less affluent, and I have never heard that argument being put forward by wealth managers.
Financial advisers advise the wealthy and a large part of their value-add is in pointing out that certain tax-wrappers are more advantageous than others- in the matter of wealth creation and preservation. But here the loop closes , as those who use financial advisers prioritize personal wealth as a means to structure their finances.
Others look at the future in other ways, looking to insure against future uncertainty through guaranteeing themselves a wage for life. I made this point on twitter.
Pleased to see demand for pensions among the highly paid is not purely driven by tax breaks
— Henry Tapper (@henryhtapper) August 20, 2020
The word “insurance” is important here as it represents another paradigm from wealth. It is what wealth managers don’t consider because the capital reservoir created by successful investment renders social insurance irrelevant. The mass affluent have the opportunity of opting-out of annuity pools just as they can opt out of the NHS and public education. They have the opportunity because they have the wealth and they have advisers who can explain to them that it makes sense to opt out of pensions too.
Why pensions matter to the wealthy too.
The 65% of affluent savers who David has identified are wrong, may have other things on their minds than the creation and preservation of wealth.
They may be thinking of the security of knowing they have a wage in later age that lasts as long as they do.
Because I know a large number of people in their 70s and 80s and 90s who get great comfort from having a regular income when they are no longer able to earn one! #pensions are a great social good!
— Henry Tapper (@henryhtapper) August 20, 2020
The Australians are waking up to the reality that most of the retirement pots from their Super system aren’t lasting the course
Or they may consider that saving into a pension isn’t usually something you do alone. Most people save into a pension as part of a scheme and their contributions are subsidized by an employer. Even if that employer is owned by the saver, there is still a sense of collective endeavor in pensions that makes opting-out an odd thing for a boss to do.
In the USA, 401k tax breaks for bosses are predicated on people staying in the collective pension. In the UK, the pension scheme is still something that bosses encourage staff to be in , because of the strong ethos of social insurance.
If I decided that the tax relief was not attractive then I’d simply save the same money into a different vehicle. The fact that it isn’t technically a “pension” doesn’t seem important ?
— David Penney (@DavidPenneyPRW) August 20, 2020
What we don’t consider matters
Recognising that other people think differently than you is a key part of empathy. You might call it “getting into other people’s shoes”.
If , as I hope he does, the current Chancellor looks to change the way pension contributions are taxed, it looks – from David’s poll, that he will not be driving the mass affluent away from pensions and into other tax-wrappers. The social norm of saving into a pension is very powerful.
However, in many ways, the loss of high earners from DC pensions is not something Ricky Sushak should lose much sleep over. By opting out of social insurance and into “wealth management” , the mass affluent are opting out of social security too. If you aren’t needing a pension , then why pay the state pension to those who have suffeceint private wealth?
Where the confusion about pensions arises, is that most people in workplace pensions are really in wealth management schemes which do not provide social insurance, merely the freedom to spend savings as the pot holder pleases.
Mark Rowlinson makes this point very well
DC isn’t a wage for life solution. It’s tax advantaged saving with strings attached. Remove the tax advantages and it’s just saving with strings attached.
— Mark Rowlinson (@markjrowlinson) August 20, 2020
What we don’t consider is that a very high proportion of British people do not see a pension as the drawing down of capital from a capital reservoir, they expect a pension from their pension. Which is why I predict a resurgence of social insurance with a lot of DC schemes converting to CDC in the next 20 years.
I am quite sure that financial advisers will be arguing strongly that their clients will be wrong to join CDC schemes. It may well be that CDC schemes, like DB schemes, may be better off without the long-living mass affluent.
These are things that are not much considered, but they matter.