Small “pension” pots are a nuisance to the pensions industry but they are real money to the people who own them and , as most people have several, can collectively become a decent financial asset which could and should help people though the last third of their lives (my proxy here for “retirement”).

Part of the problem is that we have got used to thinking about “a pension” in retirement rather than a part of the patchwork of income people will rely on to pay the bills and live a decent dignified life in retirement.

Relying on a pension or a pension pot  isn’t how retirement works for most people. Most people when they get to their mid-sixties get a state pension which pays up to nearly £1000 pm before tax. This is added to whatever we earn from work or “unearned” pensions and money we drawdown from savings or retirement pots.

Much as people would like to have one big pot instead of lots of small pots, people are thwarted at every stage. The problem of finding the pot may ease with the arrival of pension dashboards but that is still an “if” not “when” and even if it’s “when”, people will still have to deal with the tribulations of RAG ratings, MaPS referrals and the endless risk warnings issued to stop us getting scammed. Few people (including me) have one pot and when they come to getting their money back, they encounter a new set of problems (as I’m finding out).

People may turn to simpler ways of getting their money back. Right now that means full encashment, let’s hope that in future people will think a pension a better option than a swollen bank account but we may need to provide pensions from smaller pots and understand that pensions are purchased as part of the patchwork and not as a the monopoly income s0urce that replaces all others.

Many people I know have more than one works pension and some people have variable income paid to them from premium bonds and other Government schemes to which  they’ve lent money on interest. And of course , we manage our paid work around our need for extra money which is why so many people work into their seventies and eighties.

So if you are really interested in providing pensions, you have to consider your pension as only one source of many, not an exclusive!

Arun Muralidhar has helped me with this. He thinks that Government should sell strips of income to people called SELFIEs which pay an income for a fixed period of years for a given price. He think that they should be sold in £5 strips , each paying perhaps 5p per month (for instance). £1,000 might pay £10pm for 20 years. For very small sums, the business of buying a financial service may best be done using the National Savings system, though there must be a cross-over point where people may want to use investment rather than debt as a means of securing long-term income and the financial services industry is best placed to do that.

I wrote yesterday that one annuity broker – Retirement Line – will find you a lifetime annuity – paying an income as long as you live, for as little as £1,000. (Mark Ormston tells me that the floor for pot purchase is £10,000 for most providers).

I am asking my colleagues and friends whether Pension SuperHaven should consider offering a “scheme pension” for £1,000.

It comes as a shock to my system not to think of this pension as the primary source of income, but it might not – probably won’t – be.

One of my close friends wrote to me , following yesterday’s blog, saying…

This debate on small pots is of course across the board of earners. High earners may have one or several small pensions or pots.  Nevertheless it is more crucial for low earners and people who will inevitable have lowish pots at retirement.

The more I read about it the more obvious it seems to me that we should ditch AE for small earners as a pension policy and return to the national CDC idea, which deals with a lot of these issues.

He may be right, Arun may be right, I may be right , Retirement Line may be right- we all may be right!

My point is that we don’t have to think of retirement in terms of wealth. If we did that we’d hear calls to swap out the State Pension for a £250k sum or make CETVs for DB pensions easy-peasy. Creating lifetime income is hard and it’s worthwhile. Done properly it creates value for people. Annuities are a way of doing it, so are SELFIEs and of course DB and CDC pensions.

The market will decide on which of these forms of lifetime income succeed and which don’t and their availability will depend on the capacity of private providers to deliver solutions that beat public alternatives.

My friend , who is experienced over this has also written to me

That (paying for extra state pension credits)  is a ludicrously generous offer.  Voluntary NI contributions are far far far too cheap.  They are popular with people who manage to understand that their basic state pension has been reduced because of a contracted out reduction and they have not paid contributions since 2016(?) to increase their basic pension up to the full amount.

Obviously a no brainer if the individual is advised and is happy enough to accept. The bargain even it is tying up the cash in an annuity.  (There is the risk for younger people paying such contributions as they might get the full basic pension without paying for years they are missing (mostly students) but a separate issue.

He’s right of course. We need to get much smarter in understanding the options available to us when swapping pots or cash for pensions – whatever type of pension we swap them for.

Do concepts like “consumer duty”, “treating pensioners fairly” and “value for money” come into this? Of course they do. They are all part of “smart buying” in the money purchase.

But we’ll need to be careful here; we expect a lot from people as it is and we can’t bias a system towards the financially literate. Everyone should be protected from making bad choices and the best way to do this is to make good choices for most people.

These matters aren’t addressed by the discussions I read on retirement choices (including the specialist think-tanks such as Phoenix Insight and Nest Insight). But they are the real world choices that people think about. They are not the issues you take to a financial adviser and while MaPS’  MoneyHelper service and Citizen’s Advice can help, most people have to make decisions for themselves using what is available to them on the web.

The FCA and TPR are peripheral to these decisions as they concern products and solutions that aren’t on the balance sheets of private financial services.

But we need to think about the right choices and we cannot ignore those such as purchasing extra state pension, SELFIEs and national savings in this conversation.

Thanks to Mark Ormston, Terry Pullinger, Ian McKnight , Mark Johnson and Andrew Young for input to this article.