Richard Smith has become the popular champion of the dashboard. Here he brings us the latest images of what we’ll see on the dashboard. Don’t get too excited if you are a fan of complex screens but to me, the simplicity of presentation is shocking. We are learning new things about the power of presenting when and what as pensions, at an expected age- perhaps different for all pensions and no mention of pots. That’s going to be shocking to savers and it’s going to upset a lot of expectations.
I wanted to see how a dashboard would illustrate DB/DC and State Pensions alongside each other. Richard has started the video for me where I want to focus- thanks Richard.
The key items for most people will be when the money is due and what the money will be.
The Defined benefit scheme will be , for most people an “inactive” rather than “active” scheme and the estimated income won’t move around much.
The Defined Contribution Pension is likely to be available as a pension thanks to the Pension Schemes Bill requiring benefits to be available at what the dashboard calls the “expected retirement date”, this being three years before the state pension (68 we suppose) so the 65th birthday (we think). Schemes often set up a retirement date as 65th birthday, it had no meaning for a DC member but it does now, this is when the default arrives and has to be rejected if it is not to be paid out,
The second critical box (to me and I suspect to you) is the how much box (estimated income). The defined benefit is again easy, it’s what the benefit was defined to be and it’s the DC equivalent that’s going to be a trouble. Most people think a DC pot is what you get but here the pot has morphed into “expected income” and this is new.
Whereas the DB income is defined, the DC income is based on an Estimated Retirement Income (ERI) that is an actuarial calculation and no more than that. The way it’s worked out is with an estimate from the annuity market and a roll-up from today to 2038. In short it’s not going to be precise but it gives you an idea, in today’s terms of what you’ll get paid.
This is how DC schemes are going to evolve, the Estimated Retirement Income (ERI) will finally depend on the amount in your default decumulation fund and the conversion rate for someone your age and your likely life expectancy. Your provider can get into underwriting and offer you more if you aren’t too healthy. Or, as Nest seems to be doing, they can treat a large group as “social insurance” without regard for health. If you are unhealthy and like to shop around – I’d be surprised if the Nest approach will appeal to your “value for money”.
But there are likely to be a lot of people who look at these ERI from Nest or whatever DC scheme you are in and that is that the income will be a tiny fraction of your pot. That’s because it’s based on the annuity that will be paid you and even though that’s only quoting an income does not go up as you’d expect from a wage, it is unlikely be much more than 7% of your pot. This is going to be an initial disappointment to many. In my experience most people think that a lifetime income is going to be a higher fraction of their pension.
So here are two big links from the Pension Scheme Act (as will be)and the dashboard. An important date when if you do nothing, your pension will be paid you. An important pay figure – the pension you can expect from your pot.
As I have mentioned above, the income that is paid could be more or less than the ERI, if there’s no guarantee on the income then it could be higher, if fully guaranteeing income increases, then considerably less. If you are looking for a chance to get out of your pension then Nest’s version will enable to swap back to pot even after you have start getting income. You can buy annuities for life or have one you can review after a certain number of years.
But while there is going to be an enormous amount of choices if you shop around, what you get from the dashboard is very simply, a date and an amount of income for the rest of your life. This is a huge difference from a pot and this is what is – in pensions terms – a very short distance away.