Tanya Jefferies is running an article in the Mail on people who have flung money at the DWP to get extra state pension , only to find they have no headroom as they already get the most they can get. The story tells me two things
- Demand is outstripping the capacity of the DWP to give advice on top-ups
- People would rather have an income for life than a big fat bank balance.
EXCLUSIVE We wasted thousands on state pension top-ups after WRONG advice – the savers who got NO refunds until we investigated @stevewebb1 @rosaltmann @wendychambLD https://t.co/nuLMV17H8z
— This is Money (@thisismoney) April 27, 2024
Why are Paul and Sylvia not paying into a SIPP or taking financial advice?
I am sure there are a number of advisers keen to tell us that a single premium can be paid into a SIPP that can mop up unused tax reliefs and create a drawdown opportunity that is preferable to the cash to state pension conversion rate. They will be wasting their breath.
Paul and Sylvia and the other people behind the case studies in this article are looking for a gilt-edged inflation protected pension that lasts as long as they do. I don’t know why they didn’t buy financial advice but I can have a guess!
Like Paul and Sylvia and millions of others in their 50s and 60s, I have been spending time looking at my national insurance history and trying to work out what I’m getting. In the end I found out that I couldn’t pay more to get state pension credits even though I had plenty of “open years” – the reason being I had already accrued a full state pension.
Like Paul and Sylvia, I am more interested in an inflation linked pension than a drawdown policy or an annuity.
But, as regular readers to this blog know, I had no headroom! I got confused by CODs and COPEs and had to get Steve Webb to put me right! Like millions of others, I am still looking for a safe home for my pension pot!
Like millions of others, I tune into Martin Lewis’ Pension Special Money Shows to work out how the pensions work and I am content to focus on my state pension because at 63 it is now a very important part of my financial planning.
I’m still looking for an alternative to the state pension and I’m not that excited about the investment pathways I’m being offered by my pension provider.
A pension is for life and not just for drawdown
The Mail story is about the inefficiency and inadequacy of state support to meet the demand of numpties like me who can’t work out what we are getting
You would have thought that that was pretty categoric but I still thought I would lose £38 pw to the COPE/COD and still don’t get why I’m getting it paid on top of instead of out of my state pension. As HMRC’s estimate of its value as a defined benefit is £40,000, I think my gain is material and I’m pleased I haven’t got money sitting with the DWP awaiting a refund for over-payment.
That’s Paul and Sylvia’s local problem and where else in the pension system can you find examples of people clamouring to pay more into their pension scheme!
There is a lesson here
Ordinary people who tune into Martin Lewis, would rather the certainty of the state pension than a pot in their pocket.
For all the issues of buying state pension credits, they would rather send their pot to the DWP to get a defined benefit, than have the freedom of cash in hand. The fact that the DWP doesn’t want their money is incidental to their need for state pension style security and fairness.
I don’t trust insurance companies to offer me fair value for my annuity and I don’t trust myself to pay a pension for life using income drawdown!
I can only speak for myself in this, but I trust the Government with my national insurance contributions because I believe there are people in the DWP and the Treasury (GAD) who make sure that I get a fair deal.
This goes to the heart of Mike Harrison’s question about who decides what’s reasonable.
Who decides what’s reasonable?
— Mike Harrison (@HigherEdActuary) April 28, 2024
The answer in most people’s mind is the Government and that’s because people trust their Government to treat them fairly (and when things go wrong for the Daily Mail to write an article about it and get it put right).
I call on my old friend Andy Young, who was the Deputy Government Actuary in charge of national insurance (that pays the state pension bills)
Government should.
— andrew young (@glesgabrighton) April 28, 2024
This is the level of trust that the financial services community aspires to – but seldom attains. The truth is that most of us would trust an actuary if they knew what an actuary did. I trust actuaries like Mike to decide what’s reasonable.
What about Company Pensions?
For decades people paid money into company pensions to get extra pensions either at a fixed rate of return or through the purchase of added years. It still goes on in schemes like LGPS though it’s not much publicised. The rate of conversion from pot to pension is determined by actuaries based on what the scheme can afford pay.
People treat such promises pretty much as guaranteed. Of course they are not and it might be that the promise is paid by the PPF rather than the trustees of the company pension but it will get paid so long as the pension is in payment.
Actuaries can argue amongst themselves as to the use of the word “guarantee”. Technically I think I’m right in saying that to offer a capital backed journey plan you should offer 99% VAR over 5 years. I doubt that Paul and Sylvia would make much sense of that!
If I were to say to Paul and Sylvia Popplestone that their future pension provided them with the same certainty as an annuity or the state pension , then at least I would be giving them a benchmark they could understand.
People who get pensions paid by occupational pension schemes have the certainty of those pensions being paid by the PPF in the worst case scenario. They have the certainty of a Pensions Regulator making as sure as reasonably possible that that doesn’t happen and they trustees, actuaries, investment advisers and lawyers acting in their , TPR’s and the PPF’s best interests.
Paul and Sylvia sent their money to the DWP because they trusted the system. The state pension is based on fairness established by actuaries who work out who gets what. Company pensions are similar.
Offering the safety of the state pension with better rates than annuities is the kind of promise that Paul , Sylvia and Henry might be interested in – in exchange for the pot that can’t buy extra state pension credits!
“Paul and Sylvia and the other people behind the case studies in this article are looking for a gilt-edged inflation protected pension that lasts as long as they do. I don’t know why they didn’t buy financial advice but I can have a guess!”
Did you guess correctly?
As a retired IFA I find this confirmational bias and snide comments offensive. But then IFAs are poorly represented on this blog.
The vast majority of registered advisers, not hiding behind the “guidance” label, do provide valuable advice which is why those taking advice finish up with more than a living wage in retirement.
To your annuity point this couple might require a joint and last survivor annuity linked to the real cost of living index appropriate for their income group but for that they would need 30 times the emerging benefit.
For a single person, the voluntary contribution for lost years cost around £900 for each £6 per week uplift and compared with a single life indexed annuity £900 well spent but hardly sufficient to tempt even the most crooked pundit to divert to a SIPP with drawdown if that is the only budget available.
Far from being gilt-edged (does that still imply safe after the Truss intervention? or was it flushed away with Gold Plated?) the state pension falls far short of a living wage. Compared with other State Schemes it is pathetic even when you add in the means tested uplifts available but often unclaimed.
I would love to see a constructive solution (not based on actuarial alchemy) to the UK being able to be productive enough to meet the aspirations of the population, but it looks as if the rob Peter to pay Paul strategy is here to stay until we find a leader who is a Statesman.
So it was the DWP that gave the advice NOT an IFA was that your guess?
Thank you for editing before putting on Twitter