The purpose of money is to pay for things that are needed. The definition of need varies but the link with liability is strong. For most people , the fear of not being able to pay for things we need is greater than the pleasure in anticipating discretionary spending.
Or to use simpler language, when we stop worrying about being poor we have achieved most of what money can give us.
Though there are certain liabilities we cannot anticipate – for instance the boiler blowing (minor) or the collapse of our physical or mental well-being (major), we generally have a means to pay for things either out of general household income or – for something as calamitous as the need for permanent care, from the state or from capital tied up in our home. I am not saying that releasing this capital is easy or that paying for a new boiler is painless but these are matters that most people can manage – and if they can’t they have (in the UK at least) security from the welfare from the State.
The way that retirement saving has been organised through the taxation system means that most people have the majority of money coming to them in retirement through income and a small minority coming to them from a reservoir of capital (aka cash).
The emergence of mass affluence
What has happened over the past thirty years has been a shift in the way we organise our later life finances , away from the provision of an income (an AgeWage as I like to call it), to the reliance on a pool of wealth – or “capital reservoir”. This is evidenced in the way financial protection products have developed. For instance, life insurance has largely moved away from products that produce income (family income benefit, PHI and last survivor annuities) and is now organized around the provision of a capital sum – whether to cover mortality or morbidity. But more generally, the way that we organise our saving is now almost exclusively with a view to providing ourselves with wealth rather than income in retirement.
This is why there was so little popular pushback when George Osborne introduced pension freedoms , why we have so many wealth managers (and so few financial planners) and why wealth platforms have captured the imagination of everyone involved in retail saving. The capacity of the private individual to consider him or herself wealthy is now a financial goal for what we have come to call “the mass affluent”.
The curse of wealth
However, wealth does not bring happiness unless it can be considered spent. As I started this blog, there is precious little happiness to be had by looking at your pot of gold, instead there is general peril in maintaining it. Yesterday I got an email from a friend (heavily redacted but you get the point)
Being a millionaire should not lead to grumpiness (what my friend said she was prone to). It should lead to the warm glow of financial security.
This is what happens when you put your financial affairs in order so that you know what is coming and can get on with doing what you want to do in later life without financial stress.
I spend time on the financial pages of Facebook with those who have swapped the certainty of annuity income for the superficial attraction of a large pool of wealth and I do not find the swap has generally worked. People worry about many things.
- the complexities of capital taxes (not least the LTA)
- the costs associated with wealth management
- the unknown unknowns of the market (the latest but not last being the impact of the pandemic.
- the attrition of drawdown, certainly at the rates currently being taken
What wealth does, for those who do not have an underlying income to meet their day to day needs, is diminish. Judging your financial health by the size of your pot is therefore a self defeating assessment, you are bound over time to lose!
The knowledge of your wealth diminishing is usually accompanied by an increasing realization that what your financial planning did not account for was the increase in prices of the things that you need to pay for. The impact of inflation is rarely planned for (witness the preponderance of level annuities purchased , relative to those with fixed or inflation linked increases)
What is to be done?
We need to move back to an understanding of our fundamental need for a wage in retirement and away from the aspiration of affluence, expressed by capitalized wealth. We need to stop this obsession with unlocking income streams through cash – equivalent transfers. We need to start finding ways of providing people with a better way of converting retirement saving into retirement income (pooled income arrangements such as CDC) and we need to reinstate the idea of a replacement income into financial products we use to protect ourselves.
I am arguing for a return to insurance and a retreat from wealth management. In doing so, I recognise that I am arguing against the received wisdom of the past 35 years, that we should empower people to take charge of their own financial security. After 35 years of trying, we have not succeeded. Instead, I now return to the comfort of the collective.
I believe that many older people secretly yearn for a mutual model for financial security which assures us of being able to pay for the things we must have and allows us the freedom from worry – that is the curse of wealth.
The lifetime allowance is disgraceful retrospective taxation. The promise of deferred income has been broken. What sort of income do you get with £1,073,100 and how do you ensure that over 30 years in retirement income keeps pace with inflation?