“yes, no, maybe” ; XPS analysis exposes limits of signposting.


Our first annual survey of DC retirement outcomes reveals that pension schemes that offer retirees a full suite of options on how to access their funds secure the best outcomes for their members.   -XPS

This conclusion is reached by the consultancy XPS based on its experience of how people are (or aren’t) taking benefits from schemes they consult on. The report concludes that outcomes can be improved

Providing access to a low-cost receiving vehicle (such as a mastertrust) provides members with an option which will have already undergone extensive due diligence by the trustees and
sponsoring employer.

They find that some people are drawing their benefits in a tax-inefficient way (scoring high on  the First Actuarial muppetometre). Some people look like they’re being scammed. Some people are leaving their money to lie fallow in the scheme and many people are transferring out of the scheme into more expensive SIPPs – that could mean their money runs out 8 years sooner.

This blog sets out to challenge some of these conclusions in the interest of employers and trustees for whom this report is aimed.  Simply signposting “low cost drawdown solutions” is not solving the problem, claiming , as the report does, that they can improve member outcomes by 10% is a little misleading.

My view is that people will either seek advice and follow their own way, or won’t – in which case they are better following a sensible default solution, what I termed in a recent blog – “an after workplace pension”, where choice is simplified by the provision of a default spending option.

“Yes – No – Maybe!” is not what many people want. They want to see the provision of a definitive course of action , set out as the default way to spend the pot.

So what is the report saying about member’s current behavior?

It finds that people are doing the wrong things when retiring from occupational DC schemes

But even  this simple analysis confused me. My eye was drawn to a statement in the small print of this pictogram

An UFPLS is a full or partial withdrawal where the withdrawal is taxed partially at the marginal rate and partially (25%) tax-free.

This is used by some people with no regard to the tax or investment consequences and is known as “cashing-out”.  The First Actuarial tax muppetometer shows how this can lead to a massive overpayment of tax

“Cashing-out” is only one use of UFPLS and contrasts with its constructive use as a way to maximise income through the retention of tax-free growth of money within the scheme.

Here is an explanation of how UPFLS can benefit scheme members (thanks to People’s Pension)

Both flexi-access drawdown (FAD) and uncrystallised funds pension lump sum (UFPLS) are ways of taking your pension pot a bit at a time. The main difference is when you take your tax-free cash.

Taking your tax-free cash up front – flexi-access drawdown

The first way of taking your pension pot a bit at a time is to take 25% tax-free cash at the start and move the remaining 75% into a separate account, which will remain invested for you.

Then, each time you take money out of that account, you’ll pay tax on the full amount of each lump sum. With flexi-access drawdown your money purchase annual allowance (MPAA) isn’t triggered when you take the initial 25% tax-free cash, it’s only triggered once you take your first withdrawal. At any time, you can choose to use any remaining money in your flexi-access drawdown account to buy an annuity, or transfer it to another flexi-access drawdown provider.

Taking your tax-free cash gradually – UFPLS (uncrystallised funds pension lump sum)

The second way to take your pension pot a bit at a time is to take your tax-free cash gradually.

So each time you take money from your pension pot, 25% of it is tax free and you pay tax on the other 75% of each lump sum. If you take your tax-free cash gradually your money purchase annual allowance (MPAA) is triggered by the first lump sum you take. At any time you can choose to take a different retirement option with any remaining money in your pension pot or transfer it to another provider.

So UFPLS can be used by tax-muppets with bad outcomes and tax-experts for good ones. UFPLS isn’t good or bad in itself, it is what you make of it.

This stuff is seriously hard and there are no short cuts!

The peril of guidance.

I am worried that the consultants  at XPS find these retirement choices as difficult to explain as members find them hard to understand. In my experience, pension consultants find it hard to empathize with the difficulties we have making choices.

XPS recommend Trustees and employers identify , advise on and recommend

personalised savings journey for members approaching retirement.

But personalization is a Pandora’s box. The concept of personalization brings with it a need to “know your client” which cannot be achieved without an understanding of somebody’s circumstances. Otherwise they end up being “segmented”, “bucketed” and other such indignities.

When even the experts are unclear about retirement pathways, it is understandable that trustees, employers and members vote with their feet and push off.

People transfer out of occupational reasons for good and bad reasons, it would be better if they could drawdown within the scheme – but – unless they are in a commercial master trust, this is unlikely to be an option. Schemes don’t provide drawdown primarily because sponsors do not want to risk the fate of KPMG whose “target pensions” were considered a DB promise by the Regulator.

So most people have two choices, transfer out or roll -up in the scheme – often in the wrong investments. Most people transfer out because their workplace pension doesn’t provide a pension, some people stay put because they cannot make a choice.

Should I stay or should I go?

Members have very little reason for optimism as they approach retirement.

  1. No pension from the workplace pension scheme. Very few occupational schemes offer either flexi-access drawdown or the facility to make multiple withdrawals via UPFLS. Obviously they do not provide annuities or scheme pensions. The only exception is a very small number of hybrid schemes where pots can be cashed out to provide tax-free cash , avoiding painful pension commutation). So most people in an occupational scheme who wants to swap their pot for a pension have to transfer away.
  2. Trasnsition costs for transferring away. In transferring away, members  generally have to pay higher ongoing management charges but they also suffer the impact of buying and selling units via the opaque and unexplained process of a single swinging price which is an undisclosed exit fee. As with (1) above, members of occupational schemes actually have no good option if the scheme itself will not pay an income to the member.
  3. Limited  access to low-cost plans. Many people do not have any option but to transfer to a more expensive plan because a transfer to a low-cost occupational scheme that offers them drawdown options is not available
  4. Need for integrated advice. Some people feel they have to pay higher SIPP costs in return for the benefits within the SIPP that improve outcomes indirectly (such as advice not just on the pot but on general financial planning).
  5. Easy prey for scammers. The prevalence of scamming is partly as a result of the failure of either pension plans or Sipp operators to meet the needs of those in retirement. Confusion about multiple investment pathways and dissatisfaction at the unavailability and/or price of advice is the fuel to the scammers flames.
  6. Doing nothing is no better. Faced with Hobson’s choice of staying in a pension scheme with no pension or making uninformed choices, it’s not surprising many people are staying put – often in de-risked investment strategies which are unsuitable for long term investment.

Many employers and trustees know that they are leaving their members with little support and are keen for a silver bullet.

Is signposting a master trust a member solution or just risk mitigation for the employer?

We have seen that members of occupational DC plans are often stuck in arrangements where there is neither advice or obvious investment pathways. There is usually an undisclosed exit penalty for transferring away,

But are these problems solved by transferring to a master trust. The answer is “only partially“.

Not all master trusts offer facilities like regular  withdrawn UFPLS and the quality of service from those that do is variable.

The assertion that using a low cost master trust as a drawdown vehicle, could add eight years to the sustainability of the drawdown needs to be qualified. This is only the case if all else is equal. People should not be making comparisons on drawdown strategies that could last 30 years + purely on price, there are value factors to consider – most notably the investment of the money and the tax and investment efficiency of the drawdown.

And  drawing down from a master trust does not solve the issue of money running out.

We have seen how easy it is for consultants unfamiliar with the complexities of at retirement options and prejudiced about the  potential value of “more expensive” retail products, to see master trusts as the silver bullet. But whether through signposting or bulk transfers, the transfer of risk is not the elimination of risk.

It is not just employers and trustees that need to raise their game, their advisers need to be pushing for better long-term solutions to these intractable problems. Workplace saving schemes need to offer after-work pensions.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to “yes, no, maybe” ; XPS analysis exposes limits of signposting.

  1. Paul says:

    XPS only push mastertrusts because they operate one – if they didn’t do so, you can be sure they wouldn’t be so keen on them! (When I worked there, there were regular “encouragements” to push client towards Natpen.)

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