Boris Johnson having his cake and eating it
The concept of having your cake and eating it to , sometimes defined as “win-win” and criticised as “if it looks too good to be true – it probably is”, is prevalent in pensions.
It is very to the fore in Scottish Widows recent paper “Decumulation, understanding the needs of the nation“, where the idea of having a retirement income which is steady, lasts as long as you do and leaves a decent legacy is what the nation says it needs. I am ready to stand by the 1500 people interviewed because in a Panglossian world , this would be the perfect solution.
Sadly – all things to all men and women means spreading the love a little lightly and there are some tough trade offs. If people want a dignified retirement, they need to accept that all good things come to an end. Pensions come to an end when you die – or when your spouse/partner dies, but not when the dynasty dies.
The common purpose of pensions, as invented by the Australians involves a wage for life that provides the person being paid with dignity. It is not about inheritance- it is about dignity – rather than adequacy.
Cakeism
It seems to be the job of those who work in the policy think tanks of UK insurance companies to promote “cakeism” when there are insufficient ingredients. The Widows cube suggests that the most popular pension offers a guaranteed income with a legacy.
Take your tax-free cash- label it “my flexibility” but do not suppose the pension serves the same purpose.
And what if the cost of the legacy bit , makes the guaranteed pension so low that dignity is sacrificed? Then the common purpose has been set aside.
Sure you can insure the principal you invest so your pension always pays back what you’ve saved but let me remind you of a great line of John Donne
“The grave’s a fine and private place; by none, I think, do there embrace!”
The “legacy” may be elsewhere, in the house or in something less tangible, the memory of a life well lived – your embrace.
The trade offs are obvious when you come to think of them, but they don’t fit neatly into a model, which is why a three dimensional cube is actually not a good model for pensions.
A much better model is very simple, it gets you from the day you start relying on your retirement savings till the day you die with a regular income that you can rely on and budget on. All the rest – flexibility – legacy – control of investments – is something you can choose.
And you can opt-out when you know the cost of these options.
What is the cost of swapping a regular income for one that you can adjust month on month?
What is the cost of providing a legacy from your pension?
What is the cost of managing your retirement savings yourself?
These are questions you can and should be asking of advisers and providers and you should be able to get simple answers you can trust.
If you are going to take a lifetime pay cut of 10% to leave your pension to your kids, then you can make a decision around that. Similarly, if you are happy to swap the certainty of your money not lasting as long as you do , for flexibility, you can use income drawdown. If you are intent on making your own decisions, use a self-invested personal pension. But recognise that the value of your investments is linked to the competence of the manager and the cost of the management.
You cannot have your cake, eat it and leave it to the kids without consequences.
Your legacy is not measured by your inheritable wealth. Your legacy is you, the life you live, the memories you create.