How to stop us spending our pension pots like muppets.

There’s 650,000 of us

When I asked Guy Opperman on Tuesday, what had happened to the 650,000 workers who’d gone missing from payrolls and benefit claims, he replied tersely “we know a little about that“.

Clearly he knew the OBR’s estimate of tax receipts on pots encashed early.

So what can a Pensions Minister do to stop the fruits of pension saving providing little more than a bridge to the state pension? For that is what is going on.

People are not converting their pension pots into a lifetime income but they are retiring at the normal minimum retirement date of 55 and spending, not on Lamborghinis , but to get by.

For the first generation of auto-enrolment savers, those who have less than £10k in their pots and have little else, the withdrawal of a pot is a windfall. We have no idea how clever they are with the timing of the withdrawals because they aren’t taking advice or guidance. And of course a lot of the 650,000 will have good quality DB schemes behind them – paying them from an early retirement.

But for tax-receipts from drawdowns from dc pots to explode as the OBR claim they are, tells us that people aren’t drawing down smartly, they are behaving like Muppets and they’ll be rueing their freedoms in a few years time.

First Actuarial used to operate a muppetometre for people looking to withdraw their pot at one go. The example above did just that paying a big chunk of their savings back to HMRC (as indicated in the red segment of the pie).

There is of course another kind of muppetry, where savers don’t take their savings and live a lesser life for retaining their pot untouched.

The Australian Government, which has a more mature DC system than ours, recognises that ordinary working people aren’t good at converting pots to pensions, don’t take advice and all too often behave like muppets. It has seen enough and is now demanding the mighty “Supers” provide savers with an option that keeps them invested while ensuring them a lifetime income.  It is not a Scheme, it’s a fund and the fund pays a pension by recycling the unused pots of those who die early to those who live late.

We could do with such funds here

If we could turn back the clock and be 20 again, oldies like me might see whole of life CDC schemes as a way of boosting our retirement savings. Find an employer prepared to cough up at least 10% of salary for your pension, get them to set up a scheme under the putative CDC funding code and Bob’s your uncle, you could be looking at a decent pension so long as you stay put or move to other benevolent employers.

But that’s for the future, what about now? Now’s the time when the pension pinch is hurting. What can we learn from Australia. Here are three simple lessons for Government

  1. Don’t rely on employers to sort this out for you. Frank Field’s British economic miracle  the defined benefit pension scheme, is – but for the public sector- a thing of the past. Employers do not want to pay former staff a pension – for the most part. I suspect that most employers will take one look at the CDC code and say “no thanks”. There will be enough to make all the regulation worthwhile , but don’t bank on employer funded CDC turning the problem around.
  2. Don’t rely on advice and guidance. It’s expensive and unless “self-interested”, it doesn’t get results. Australia is teaching us that people need more than a strong nudge or an investment pathway to swap their pot for a pension, they need a default.
  3. Make sure the product providing the default pension option works.  The Australian Super system is showing that a combination of private sector dynamism and strong regulation leads to value for money solutions that turn savers into responsible spenders.

Turning savers into spenders

The Pensions Minister has told me that Jo Gibson and her DC team are about to embark on a major project to turn DC savers into spenders (decumulation).

That’s good. I want to help and have offered to make some introductions to people who are Australian and know how the Australian approach could be adapted for the UK.

It would have been easy to have pretended that this is the FCA’s problem, it isn’t. The DWP is the department with “Pensions” in its name and it’s got the Pensions Regulator to sort matters out. Right now , most people are saving into workplace pensions regulated by TPR not the FCA and the “pot to pension” problem sits with the Pensions Minister.

Which is why (I suspect) the Pensions Minister is getting a little frustrated with the Pension Experts who are bringing him problems but not solutions.

To be fair to the frustrated Guy Opperman, he did give me an hour of his time, he has listened and we will be congregating soon to look at how the Australians are sorting the “pot to pensions” problem and what can be done in the UK right now to stop people behaving like Muppets with their pension pots.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to How to stop us spending our pension pots like muppets.

  1. Martin T says:

    “…whole of life CDC schemes as a way of boosting our retirement savings…you could be looking at a decent pension so long as you stay put or move to other benevolent employers.”

    But given the increasing tendency for people (particularly younger workers) to have multiple jobs/part time jobs/zero hours contracts/side hustles, then I’m convinced there will be an increasing tendency to have multiple employers in a working life. I’ve seen a statistic oft quoted of 11 employers on average. I think that is probably out of date, understates the current situation and massively understates the future one.

    That means that CDC can only really work if we have multi-employer/master trust/industry wide schemes which are available to the self-employed.

    • henry tapper says:

      CDC “schemes” work well for stable employment – RM’s employee’s work there a long time. Schemes like USS see employees moving from one university to another in the same scheme, the same for railway workers. And the self-employed can of course stay in Nest and other master trusts throughout their careers. But these are exceptions. The rule is that most people move from workplace scheme to workplace scheme and don’t take their pots, let alone CDC entitlements with them. When trying to integrate a new type of pension into an established system, all kinds of problems occur, not least with duplication. Doesn’t CDC in accumulation look very much like DC? It’s actually when you start getting a scheme pension after you’ve stopped the saving that things are very different. This is why a lot of people, like me, are looking at decumulation only CDC funds which retail savers can select, rather than relying on an getting lucky and joining an employer funded scheme.

      There is also the thorny issue of how you price transfers into a CDC scheme.

  2. John Mather says:

    What about the self employed?

    Why is so much energy expended on making the pensions subject even more complex and opaque?

    It is the pot size that is so pathetic and that, along with other reallocation of assets, is a function of a poor performing UK economy and an obsession with instant gratification based on debt over saving

    Pensions should produce a living wage and as soon as they can they should be made available which would imply some people never stopping work. It is your savings rate that dictates your retirement date. The rest is just noise

  3. John Mather says:

    Did you watch the “Budget” speech?

    The £500bn plus of index-linked gilts, which looked like virtually free borrowing a year ago, is now a millstone with the RPI inflation which they track running at 8.2% (February 2022).

    In 2020/21 the government spent £23.6bn on debt interest. For 2021/22 the OBR reckons the cost will be £53.5bn, a 127% increase. 2022/23 sees a further 55% jump to £83.0bn, which, as the Chancellor noted in his speech, is a near quadrupling over two years.

    IS it not time to address the real issues?

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