Anyone doing any thinking about how those outside the pension system could turn savings to pensions? Arun Muralidhar is.

I’m fed up with hearing how “small pots” are best cashed in. Small pots with a few thousand pounds in them, may not mean much to big shot pension people who are after six-figure pots, but they are the very meaningful life savings for many less fortunate.

Those who end their working careers with one or more small pots aren’t catered for by the financial services industry. The best they are offered is a bank account when what they were told they were saving for was a wage for life.

The  state has an important role to play here and I look to the pioneering work of Arun and Robert Merton in creating pension bonds they call SeLFIES as something we can use in the UK. Today comes good news that these SeLFIES aren’t just being bought by those with small pots, but they’re being bought again and again. This is happening in Brazil of all places!

This blog explains what is going on and asks should our National Savings Office be sitting up and taking notice.

This slide is provided by Arun  and forms part of a two page report that you can read  here

You can download the slides from this link.

What is  “Renda +”  and what does it mean for the UK

Renda is the social security system in Brazil that keeps the poorest section of society from destitution, Renda + is a second pillar of pension provision which allows Brazilians with limited savings to exchange their savings for a strip of income paid in retirement for a pre-agreed number of years (it’s a kind of AgeWage).

It is a bond, it is finite and it is inheritable. Arun Muralidhar calls is a SeLFIE and you can read the learned paper he wrote about it with Robert Merton here.

Renda + is a system that can allow those who need income in retirement and have savings , buy retirement income from the state. It is a kind of gilt that could be bought here as national savings certificates

At the moment, certificates can be bought either by electronic mode (e-mode) or Passbook mode. While the passbook method is unpopular and comparatively more tedious, you can effortlessly buy an NSC scheme with a savings account at an authorised bank or post office.

So SeLFIES could be used in the UK by those with pension pots to buy pensions and could be a useful alternative to annuities or drawdown – which aren’t really geared to those with small pots .

These strips of income can be inflation protected and while they don’t carry longevity protection today, they could become lifetime income bonds – if the market demanded.

What is this new information telling us

The good news from the slide above comes in a few bullets (sorry for the size of font on slides)

• In Renda+, 60% of total investors have already made more than one contribution over time.
• The more contributions the investor makes, the higher the median purchase ticket. This same behavior is also seen in the custody balance.
• Recurring investors in this bond are, for the most part, men (67%) and single (55.5%), mostly from the Southeast region.

Although SeLFIES have only been selling in Brazil for a few years, there is already evidence that beyond the first year, when many are encashed early, they are generally held for some time and those who buy once generally buy again.

Some savers buy with a lump sum, some use savings plans but the numbers suggest that of the 70,000 who have already bought , around 45,000 bought again. I don’t know much about the newer Elektra bonds, but they seem to be showing the same buying patterns.

This is telling me that the National Savings Office  should be talking with Arun and the DWP should be in on the conversation.

Millions of British workers are outside the workplace pension system- either because they have the wrong earnings profile, are self-employed or have opted-out. Most of these people have savings and as Martin Lewis money shows evidence, ordinary people trust Government savings schemes and buy extra state pension.

Many people have excess cash which could be used to provide strips of retirement income as a substitute for an annuity or drawdown.

And the fact is that the financial services industry has not got an answer for small pots , whether they are in or outside approved pension arrangements.

This is not an advert for Brazilin Bonds, but it is an advert for SeLFIES and for their adoption in the UK – as a new kind of gilt.