Do you want to pay school fees for your pension?


In this article, I challenge the pension industry to consider its promise to those saving for retirement – implicit in the phrase of “a pension plan“. My challenge is “where is the planned pension?

In an interesting article on the development of CDC Adrian Boulding sees a future where

“CDC-based decumulation may well be your best option, if indeed that option is extended to all DC policy holders which really it ought to be in the fullness of time”.

Notice the use of “policyholders”,  Adrian is not here talking of people funding CDC pensions through the workplace but with the individual policies (or pots) they have built up over a lifetime’s work. This type of CDC is a means of turning pots into a pension.

Adrian then makes a strange statement which I find hard to reconcile with the behavior of pension consumers or pension advisers.

As with all new choices in decumulation, especially those like CDCs which appear to offer such high hopes for individuals looking to optimise their retirement income without taking crazy risks with their savings, it’s always going to be worth consulting a financial adviser.

I challenge Adrian as to why people should take financial advice on whether they should follow the pension plan. Surely the plan should make sense for most of us? The decision to opt-out of the plan might need advice, but surely the plan itself need not be advised.

CDC’s will be large, run under trust law and devised to offer a wage for life on a “take it or leave it” basis. As the CWU’s Terry Pullinger puts it,

they’re for people who want the freedom not to use their pension freedoms”.

The regulation of CDCs focusses on schemes ensuring the consumer knows the risks of an investment related income and to create confidence in a potential pensioner that their money is not going to run out before they do. Similarly, UK CDC is designed to distribute 100% of the available fund to spenders over time, it is not designed to provide an inheritance, or fund care fees, it is simply there to provide  wage for life. So the income should be dialed to maximum to ensure that no buffer is being built in that could skew distribution from one generation of spenders to another.

So my guess is that those who using CDC will be those who get the product and have confidence in what it does. It is what the Americans call “a safe harbor product“. We are used to such products in pensions. Nobody queries enrolling in a workplace pension – it is clearly a better option than a non-workplace pension as it offers an employer contribution.

But we are learning that workplace pensions are also better investments than SIPPs in terms of charges and default investment options. For most people the vanilla product – with all its defaults, is outperforming the sophisticated DIY SIPP, just as workplace pension defaults are out-performing self-select funds within the workplace pension. That is what we mean by “safe harbor” (aka vanilla) (aka default).

It is not in the DNA of a financial adviser to recommend a safe harbor product such as a CDC pension, when he or she can offer a better solution on an advised basis. Look at what a tiny portion of annuities are purchased through advisers  and look at the huge numbers advised to forsake a company pension.  “Wage for life” products are not what advisers recommend.

Advisers recommend solutions where they add value, through tax advice, financial planning and through investment advice and fiduciary management. CDC  pensions offer very limited opportunities for advisers to add value in any of these ways. So, were “CDCs” generally available the adviser’s pitch would be “there’s nothing wrong with CDC, but you could do better“. And that pitch has to be on the basis of the  “special needs” of the customer.

Those who understand the tapers and cliff edges of the benefit system will tell you that many people are better off not getting a private pension but using their savings up as quickly as possible, this is a form of “special needs”. I would be sorry if this state of affairs continued for ever, I see workplace pensions as a means to get people off benefits in later age but we are where we are.

Most advisers will not advise people on benefits (unless they are setting up equity release). The “special needs” they will be addressing will be luxury items. Many wealthy people do not need any extra income in retirement and are much more interested in succession – the capacity to pass wealth on to others, than in the spending of their retirement pot. For them there is need of advice to maximise the many opportunities pensions offer those with money – to pass it on. For such people, opting out of CDC pensions is a reasonable option (as is the appointment and retention of a financial adviser)

And if the aim is not to plan for the inheritance, it may well be to create a bespoke retirement income structure based on the kind of cash-flow modelling that financial planners are uniquely qualified to do.  Where a bespoke sequence of payments is required , then the financial adviser becomes the paymaster and a SIPP is a more flexible option than an inflexible CDC plan. I would also include among those who need advice, a section of the population who believe through their own wit and the help of a wealth manager, they can achieve returns on their investment that exceed those from any safe harbor product,

But these groups are exceptional and not general. The general spender (as has been proved by several surveys) asked for what they want from their pension, describes a pension. Indeed they have brought up thinking they are in a pension scheme, not an “inheritance scheme” or a “spend it before the Government takes the money back” scheme.

And the word “scheme” or “plan” has further force. It suggests that there is a method in what seems madness. The message to the younger self is “That method , plan or scheme will be revealed later, for now- just save“. Generations of people born in the fifties and early sixties are now reaching that stage in their life when they want to or have to start thinking of winding down from work. They are now asking “What is the plan, where is the scheme?”

Frankly, it is disappointing to be told that the plan now involves seeing a financial adviser. My partner and I have just been offered an initial consultation with an adviser for £750 (+vat) and we it’s tempting to take up the offer as it is heavily discounted as we’re buying through her work.

I have been a high earner and have wealth to boot but even I don’t want the complexity of managing my retirement income or paying an adviser to do this for me. The total bill for the initial advice , implementation and ongoing fees will run to tens of thousands of pound over my remaining lifetime and that is beyond my means and the means of most people I know. It’s the latter day equivalent of private education or private healthcare.

But unlike education or healthcare, there is no state solution to fall back on – for those with a pension problem . If you don’t want to go “private” which is what an advised SIPP adds up to, you have to rely on guidance from Pensions Wise and make your way home via the investment pathways. Frankly there is no plan and people know it.

There is an article in Corporate Adviser with the title “Workplace savers sidestepping investment pathways“.  It refers to Philip Parkin’ latest work for DCIF

The report finds that while the FCA’s investment pathways were designed to help members better align their investment strategies with their retirement plans, early indications suggest members avoid them and remain invested in scheme defaults. Based on feedback from providers interviewed for the report, most members are avoiding investment paths altogether.

Let’s be honest , there is no plan at the end of the workplace pension . There is freedom but no pension –  just a bunch of pathways or the option to “go private“.

It is now time to put that plan in place. Adrian talks about “new choices in decumulation” but there is really only one choice for most spenders and that is a DIY approach which at best involves a pathway and at worst means putting the pot  in the bank and paying the tax bill or leaving the money in a de-risked pot , waiting for something to come along. These aren’t plans, they are quite the opposite.

What people want is a walk through from the saving phase to the spending phase of their pension plan which does the work of converting pot to pension for them , in a controlled and safe environment that assures them of value for their money.

Most people do not want to be advised , they want to be guided from one phase to another with a minimum of fuss so they can get on with enjoying the longest holiday of their lives.

So , I have to disagree with Adrian. CDC is not another advisory option, it should  not need a financial adviser’s validation. Part of it’s attraction is that it is for those who don’t want to use pension freedom and part of its attraction is that it’s a “safe harbor” product that doesn’t need advice. Advisers have quite enough to be getting on with , not to have to worry about the hoi-poloi who just want their pension.

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 Do you want to pay school fees for your pension?

  1. Adrian Boulding says:

    Henry, I love your analysis, and thank you for reading my piece. But, a good financial adviser will begin the retirement process by extracting from the client the right mandate. Setting down clear and realistic goals of what they want their retirement finances to deliver over the different ages of retirement, from early active years, later quieter years, nursing care, inheritance for kids and throughout viewing the clients as a couple not two individuals. Where clients have lots of assets, a CDC plan will meet some but not all of these needs. For clients that perhaps should have saved a little more in their working life, a CDC decumulation plan may be the most suitable home for all their pension. In which case the advice will be a “once and done” affair, and the adviser will set that client up and then move onto the next. Good advisers are not short of clients, so they don’t need to hang onto the ones that they can sort out with one transaction. Adrian

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