I read Corporate Adviser and have a great deal of time for its staff. I have a great deal of time for Standard Life. But if Standard Life and Corporate Adviser are to convince me that “people’s ideal retirement savings” is £250.000, they have a job of work to do!
Imagine thinking about your next job that way. You wouldn’t would you?
I am sure that a salary target would be high on the list of requirements but no-one capitalises their future income unless they are on a short-term contract. I am thinking of my retirement in many ways but not as a short-term contract.
I am not sure if this is the wealth management industry trying to capture our conception of retirement or it being captured by the inadequacy of the “pension industry”.
Reluctantly I turned to Standard Life’s Retirement Voice report but could find only the 2023 version. So I’m relying on Corporate Adviser to understand where this £250,000 number comes from and the answer is – well – bonkers!
How do we get to what people want? Bonkers (pt 1)
So – what people want is a “moderate” level of income , which is roughly twice the state pension or something around £25,000 a year. The PLSA has never said that people want a moderate retirement income. They have simply set a level of income they consider meets the needs of those who want to be moderately well-off. It is bonkers to claim that people want £25,000 a year in retirement when there is no evidence for it
So how does bonkers (1) turn into bonkers (2)?
Bonkers (2) is the presumption that those who aspire to a £25k income in retirement, can fund it with a pot of £250,000. This assumes an annuity at around 4.8% – an annuity for a 66 year old with a contingency built into it (responsible forecasting from Claire Altmann and her team as current annuity rates are unlikely to last). You might get a fair bit of inflation linking for that kind of conversion factor but you would not get the triple lock.
The average drawdown – according to FCA figures is 8% pa and most people start their drawdown a lot younger than 66. The 8% mob will be looking at £250,000 and saying £20,000 pa (or £32,000 pa with state pension), rather more than the measly £12k assumed by Standard Life.
What is bonkers (2) is for Standard Life to measure people’s retirement expectations by means of an annuity conversion rate that acts as a quasi DB benchmark. Nobody but a bonkers person would buy an annuity if they were struggling for retirement income. It’s like telling an underfunded pension scheme to buy-out rather than go into the PPF.
The Hutton formula was simple, save more- start earlier – retire later. Actually there is a fourth dimension – get VFM from your pension (but that was assumed by Hutton – a failing).
So how do you measure the amount you need to have saved? (bonkers 3)
In Stephen Budge’s excellent contribution to the latest VFM podcast, he poses the question “how do you measure VFM in decumulation?”
The answer is simple, you establish the risk free return of your pension against the annuity rate.
If you haven’t got a risk free rate of return , you don’t have a pension, you have collective drawdown
If you can get more risk-free pension than annuity, then you are getting VFM, if your drawdown is at an acceptable risk relative to the annuity, you are getting VFM and if it isn’t – then the annuity is VFM. This may sound complicated and it is.
It is not a decision that most people are prepared to take as they have no way of knowing what risk they are taking to achieve the income they desire.
Bonkers , bonkers , bonkers
It is absolutely bonkers to think that people aspire to a £250,000 retirement, any more than they aspire to a £250.000 job.
It is absolutely bonkers to assume a c5% conversion rate from capital to income when only 10% of people buy an annuity.
It is conclusively bonkers to tell people they are £119,000 underfunded in retirement based on this ludicrous formulation.
It is no use asking people to consider their retirement like they were DB schemes, Not least because they plan holistically and not just with their pension pot, but also because most of us fund our retirements using our best endeavours and not an annuity contract.
People need better investment options when they save and better pension options when they spend. Pension companies should focus on Value for Money and not use unpublished “research” to frighten us into saving more for longer.
We need to ignore more or less everything that comes out of the pension/life insurers. It’s a very significant issue in the uk that successive governments have tried to wash their hands of the retirement income conundrum by passing the issues over to the agents. But the agents’ vested interest renders virtually all they say as nonsense. Or, it’s so heavily influenced by their commercial interest so as to be of no use for policy or the working man/woman.
Median household income after taxes is £34k (?). Median pensioner household income (( couple) is c£30k after taxes and housing?
A pension is but a hypothecation of GDP to the non-working elderly, a ‘thank you’, if you like from the economically active, presumable excess GDP? The ‘industry’ constantly pushes for larger pots and contributions ( to increase their graft on AUM), delivering lower returns of course, but it’s pie in the sky to expect the working person to accrue a pot of £250k, and if you do the maths over 13m pensioners there is just not that excess capacity in our economy.
Target sensible modest pensions for the non- working elderly, bolstered by investment in the economy, decent returns, investment in our youth, their education and jobs, and those future generations might just acquire the propensity to pay them. What’s the alternative?