Why I’m resigning as my personal pension actuary.

An Australian expert tells us  a lack of financial literacy and education contributes to most retirees not wanting to spend their superannuation.

“The financial services and superannuation sector has been focused almost solely on investment and supporting the growth of accumulators who are entering or part of the workforce,” he said.

“There has been limited, if any, investment into education on retirement, outside of a few resources, which means the basic understanding of superannuation for most Australians, let alone retirees is very low.

“The lack of education and understanding has meant that many entering retirement simply have no idea how long their capital will last, nor how much they can reasonably spend without having a major impact on this.

“The result is a default to what the government says is an ‘appropriate’ amount which in reality, is aimed at ensuring super balances are reduced to zero in someone’s 90s.

“Put simply, most retirees aren’t empowered or informed enough to know how much they can really spend.”

Does this sound familiar?

Thanks to David Harris for drawing my attention to this article entitled

Government to look at advice as it probes Australians’ reluctance to spend super

Apparently, the  Australian Treasury  believes problems with financial advice are impeding Australians from accessing their super

I have spent half my career believing we can make savers into their own CIOs, I don’t want to spend the other half as my personal pension actuary.

Let’s take a step back.

The vast majority of us know enough about cash management to stay solvent and enjoy life provided we have a wage coming in. We do not need a financial adviser to tell us what we need to earn, nor an adviser to tell us how to spend our earnings. We just get on with finding the right job to give us satisfaction in and out of the workplace.

When it comes to pay reviews, we expect our salaries to go up with inflation but we don’t walk out if sometimes they don’t and sometimes we have to take a step back in pay, when for instance we want to work less hours or we take a less demanding job. In such circumstances we adjust our lifestyles to meet the challenge of reduced money coming in.

So far so good.

So what’s different about retirement?

Let’s start with the premise – as is more true in Australia than the UK, that most people don’t reach the point they want to wind up work, with a replacement income to meet their ongoing needs. Let’s assume instead that they have a capital reservoir from which they can draw to pay themselves the income they no longer get from work. It sounds easy, but it isn’t. As has been noted before on this blog – turning a pot into a pension is the nastiest hardest problem in finance.

If you are a financial economist , you trust the markets and buy an annuity, but since we had the freedom not to, only 10% of us actually choose to swap pot for pension. That’s with the annuity culture we have in Britain – in Australia virtually no-one buys an annuity – why not?

People clearly find it hard to exchange a pot for a pension because of the massive “regret risk” of making the wrong decision

  • could interest rates go higher and leave me withing I’d waited?
  • am I really likely to live long enough to benefit from this?
  • do I trust the insurance market?
  • could I spend the rest of my lifetime regretting a decision I take in a moment?

These are only three of many questions that stop people committing to a course of action which is both logical and one that in the long-term will give them great comfort.

Unlike choosing a job, we find it hard to choose a pension, so most of us don’t. If it was that easy – we would.

Is advice the solution?

Putting aside capacity issues, would have an adviser to tell you how to spend your pot, help? Probably yes, so long as the adviser was there, and therein part of  the problem. “An adviser is for life , not just retirement” or so most advisors tell us. The need for advice is ongoing, advisors don’t want one-off transactional work and you don’t want an advisor who tells you what to do and then waltzes off , never to be seen again.

For most people, engaging a financial advisor comes with the obligation to keep in touch and that’s usually because you sign over all or a proportion of your pot to his or her charge , allowing an advisory charge to be docked each year to pay for that advice. This suits a lot of people- witness the success of the wealth management industry.

But there are three snags that come to my mind

  1. the aforementioned capacity, there aren’t enough advisers to go round
  2. affordability, the fees for the kind of work an advisor does are beyond what most will pay
  3. decency, advisors are under a consumer duty not to charge fees that do not offer value for money, even if someone was prepared to pay, advisers might not feel comfortable taking the money

This is where the Australian Treasury needs to do more thinking.

Done for us.

The one successful mass-market financial strategy of the past twenty years is auto-enrolment. It gives the silent majority a reasonable solution and leaves the vocal minority the opt-out into what they want. The opt-out is critical and it’s something that we do very well.

Unlike Australia , we can opt-out of retirement saving and unlike Australia , we can opt-out of voting. By staying in and saving and voting, we have exercised choice, or at least feel we have not been compelled.

We should learn from this when it comes to turning pots to pensions

Compulsory annuitisation was unpopular and resulted in a populist policy known as “pension freedom” , which is presenting the same problems over spending as faced in Australia.

Some call for compulsory guidance (through a mandatory trip to Pension Wise) but Pension Wise does not seem to have left a lasting impression on those who use it.

Should we draw David Harris’ conclusion?

We have yet to find the advisors or the inclination among the British public, to pay others to tell us how to spend our money. If we consider advice necessary, then we should abandon any pretence that saving for retirement involves a pension “plan or scheme”.

The public has been sold the idea that their workplace saving will result in an income in retirement which – combined with their other resources – will keep them solvent. Nowhere at the point of sale was the need to take advice part of the deal.

Auto-enrolment is the answer, a nudge towards a default in retirement solution that we can opt-out of. The answer is not advice, the problem is to find a nationally acceptable pension that isn’t an annuity.

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 Why I’m resigning as my personal pension actuary.

  1. John Mather says:

    The number of advisers will continue to decline. Even SJPs system of business succession is experiencing strain. The risk reward is no longer there and innovation is punished.

    The services provided today go well beyond the 1946 ambitions. Do you think that we need a comprehensive rethink?

    Here is a general outline of how funds are spent within the social security budget:

    1. State Pensions: A significant portion of the social security budget is allocated to funding state pensions for eligible individuals who have reached the state pension age. This includes the basic state pension as well as any additional state pension entitlements.

    2. Benefits for Working-Age Individuals: The budget provides financial support to individuals of working age who are unable to work due to illness, disability, or unemployment. This includes programs such as Employment and Support Allowance (ESA), Jobseeker’s Allowance (JSA), and Universal Credit.

    3. Housing Benefits: Funds are allocated to housing benefits to assist individuals and families with the cost of rent or mortgage payments. This includes support for both social housing and private rented accommodation.

    4. Disability Benefits: The social security budget also includes funds for disability benefits, such as Personal Independence Payment (PIP) and Disability Living Allowance (DLA). These benefits aim to provide financial support to individuals with disabilities to help them cover extra costs associated with their disability.

    5. Child Benefits: Financial support is provided to families with children through child benefits. This includes regular payments to help with the costs of raising children.

    6. Carer’s Allowance: Funds are allocated to provide financial assistance to individuals who provide unpaid care and support to someone with a disability or health condition. Carer’s Allowance is a means-tested benefit available to eligible carers.

    7. Other Support Programs: The social security budget also covers various other support programs, including maternity and paternity benefits, bereavement benefits, and support for vulnerable individuals and families.

    The trend is towards more support but rarely at a level to provide a complete solution. It all comes back to education, innovation and productivity to align expectation with capacity to pay. Unifying policy and leadership taking a long view is required but where are the Statesmen to deliver the vision?

  2. I think we’ve all had enough of experts. The sheer arrogance underpinning the ‘Australian expert’ who decries Aussies not spending enough in retirement because they are illiterate is amusing. What a windbag. Here is a very useful rule: people are rational and they make far better decisions about their own circumstances than ‘experts’ can. A true expert would stay clear of making judgments about the spending patterns of retired compatriots.

  3. Richard Chilton says:

    On Saturday I visited a friend in his mid 70s. His wife had suffered a stroke last December and he was now effectively her main carer. Her future travel was likely to be just moving between a hospital style bed and a wheelchair. His travel was now limited to visits to the local shops.

    I am not sure what a financial adviser could tell them, other than it would have been better if they had spent all their pension money before the stroke happened. Going forward, state benefits would provide all the money that they are likely to be able to spend even if they didn’t have a penny of pensions and savings.

  4. Peter Tompkins says:

    Our psychology when it comes to spending is interesting. Although there are people who do spend as much as they can there is a risk aversion which makes a lot of people remain frugal and drawing down much less from their capital than their remaining years would allow them. I admit to bring one of those.

    But there are two reasons for this. One is that they don’t properly comprehend the correct balance and then lead a less generous return than they really can afford. The other is that they are happy with their expenditure levels and relaxed that their remaining pots can be left for their heirs.

    Discussions are probably better conducted by behavioural scientists rather than financial advisors!

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