Occam Investing – thanks!
Occam Investing is a blog I thoroughly recommend. Its author is anonymous but highly qualified, meticulous in the presentation of his/her work and the narrative is relaxed, personal and pitched at those (like me) with little aptitude for complexities! You can subscribe to the blog here, I hope the author gets as much fun out of Occam as I am out of my blog. The author is also on twitter as @OccamInvesting.
What DC pot sizes tell us about financial resilience today
I’ve nicked some of the charts from a recent Occam blog that repurposes ONS data on pot sizes to show that the amount we’ve got coming from our private pensions isn’t as much as we might think. I’m going to look – not at the wealth in the system, but at the lack of it. That’s because my focus these next few months is on what the least wealthy (aka poorest) in our society, do with the limited means available to them.
My argument is simple, many people will be financially resilient over the next two years with the help of their pension savings. Occam’s charts show us why we should be focussing our efforts on those with small pots, they need our help most.
Occam starts by looking at the distribution of pensions wealth across age bands (cohorts)
This shows a picture of pension wealth concentrating on those approaching state pension age with it diminishing as people get into their later years. Those who worry about lack of consumption may ponder why there is so much wealth in the 75+ cohort, but that’s not for this blog.
Even these averages don’t suggest that with a drawdown of 3-4%, the average saver is going to be anywhere near what the PLSA consider “comfortable” in retirement, but they show that there’s a lot of wealth in the system for all that.
But things start getting less rosy when you consider that 55% of us have no pension wealth at all
It’s worrying because the self-employed, those caring for others and those who are simply not working, are not enrolled. There are also opt-outs of auto-enrolment (and increasing number of them). Put these people on the first chart and averages start falling
But this is still fairly abstract information , we need more granular charts to work out what the distribution of pot sizes is. Occam, creates two really good charts that show that the bottom quarter of pots when looked at separately , are nowhere near £100,000 at maturity.
If we look at personal pensions, which tend to be funded with discretionary spend (above AE minima) the picture looks like this.
The orange dots are shooting away, representing the kind of wealth looked after by advisers at SJP, non-advised SIPPs and by IFAs. The red dots may or may not be advised, but the pots represented by the blue dots , those who are in the bottom quarter of pension savers by pot size, are unlikely to be getting much help- other than from Pension Wise.
And when we get onto occupational schemes, some of which like those of the banks are super well funded but most of which , like NOW, Nest, People’s, Smart and Cushon- aren’t. The picture is even more dramatic
The blue dots are struggling to get beyond a £15,000 average.
So what does this tell us?
It tells us that we cannot generalise about pension wealth. More than half of us haven’t got any and so we should be congratulating the 45% who have got some (not telling them they haven’t got enough!)
It tells us that the bottom half of savers are struggling to have saved £50,000 when they get to state pension age and that the bottom quarter struggle to get to half that.
It tells us that pension wealth , as recognised by the wealth management industry and to some extent, insurers, is really concentrated by the top quarter of savers – only about 12% of adults and that we simply can’t treat pensioners as a homogenous group. Most pensioners will regard their private pension as a side-pocket , their income will come from the state pension and benefits. This is Steve Webb’s lesson to us
A sobering thought
I am hearing a lot of tosh at the moment about our pension pots being precious, that they should be preserved for the future and not spent on household bills as the cost of living crisis squeezes us.
But when we look at the proportion of income coming from occupational Dc and personal pensions (look at the pink slither), then we get some perspective. It really doesn’t make much financial difference to the low-earner whether they spend their pot now or in a few years (we’ll leave out the implications on means tested benefits which point to spending now).
In the grand scheme of things, what matters is that people have got pension savings available to them right now- which they could fall back on – if they needed to as fuel poverty kicks in.
And that is precisely the message I would like the pensions industry to be giving those people needing reassurance. We can give those over 55 this assurance.
“You may not get by without access to your retirement savings. If you need it- here is your money.”
Thank God for auto-enrolment which means millions who would have nothing, will have enough. It may not have made us self-sufficient, but it will get millions through this crisis.