Most of us use the waiver and dodge the guidance guarantee!

In 2014, the pension freedoms came with a Guidance guarantee. It is still in place but little used. It has been overtaken by the pension platform and most recently by the decumulation defaults introduced by the Pension Schemes Bill.

The idea of the default decumulation is that everyone with a pot gets defaulted into a pension. In this blog I argue that almost everyone can use digital tools to work out what they’re getting and if it’s what they want (most won’t bother and will accept default but they need to have guidance to help them, even if they ignore it).

We needn’t waiver. We should enjoy using value for money software that helps us whether we are choosing or accepting the default.

The £50 pm pension and the value of the state pension

There is an argument that we should not provide pensions from small pots. But I think it a weak one. £50 pm is the kind of pension I’m thinking and I’m interested in what kind of guidance can help those with pots of around £10,000 get it for life by default

Let’s start by looking  at what someone on a small pot might get  under the decumulation default proposal. In the back of my mind is how the Guidance Guarantee might work. I was thinking how the software for people looking at their pension might develop…my question to myself

Well how would it give guidance with a default retirement income solution?

I thought I’d take this case study, the person offered a  £50pm pension,  a “small” pension.

Rate and increases

Let’s suppose that I started with a pot of £11,500, took 25% cash and was left with £8,571.  That would – using  a 7% conversion rate – amount to a pension of £600pa – £50pm. There would be  some hope of increases depending on whether it was paid as annuity, CDC, retail DC or converted into an occupational (DB) pension.

I have written in recent blogs that 7% is a fair conversion rate.  Turning £8,571 into £600 p.a . may not seem “value for money” but it is more ambitious than the 4 or 5% conversion rates often discussed amongst those working in retail retirement income.

These rate calculations work as well for the person with a £11k “pension pot” as one with £100k. A £115,000 pot will buy £6,000 pa (£500pm) – double that and you have enough to buy something like £12,000pa  – the state pension. Of course you’d need a bit more than £230,000 to get as good a pension as the State Pension , what with the triple lock.

I have a view that the thing that will differentiate default decumulation is the positive (or sometimes negative) pension increases or decreases in the rate. To me VFM works as well to determine rate for a large sum as a small pot converted. If I wanted “Guidance”, it would be on increases/decreases to date and the likelihood of long term rate increases.

I doubt that there’s much potential for increases from a level annuity (what you’d get now in the market), there’s some hope from DB pensions and plenty of hope from DC pensions and CDC pensions. If you are chasing long-term returns then the more risk you take, the more you’ll get in increases.

I think that guidance should be guaranteed by Government so that people know what they are being defaulted into. Some people may see other options as better for them than the one they are heading for. It is easy to explain rates today and increases tomorrow using a VFM explanation of what you’re going to get.

It’s not hard to lay all this out, it could be an extension to the pension dashboard.

Security

One way that differentiates those four methods of paying a pension is certainty. Annuity and DB at one end , CDC and retail DC pensions at the other. The former two are more secure, the latter have greater upside but the chance they could go down below £50 pm.

I would like to have guidance over the security of the retirement income solution I was heading for by default and – if I wanted it – guidance on other options that might be available. Not all of those options might be available without transferring my pot.

I would want guidance about options or at least information on the default so I knew what I was likely to get. VFM looks a good way of allowing me to make comparisons on security too.

For some people it’s a punt on the future , for others it’s deadly serious the rate’s sustained, security is a big feature of value when it comes to our pension money.

Guidance must emphasise that value needs to be worked out over time

Ordinary savers won’t have to make a decision on what kind of retirement income solution (pension) they are left with. Do we want the security of a pension or annuity or the possibility of growth and of loss (DC and CDC pensions)?

Security is a key feature that can be assessed using a value for money framework. If a saver wants security more than increases then the guidance will give differing answers under VFM. The VFM service can help people understand  value for their money over time.

Features and flexibility

There is a third factor that matters a lot to many people, especially those with not much else.  I suspect this matters particularly with small pots , especially where there is no other pension pot to consolidate, where £11,500 may be all there is and after £2,875 is in hand £8,571 may be regretted as a cash sum (taxed or not).

So Nest’s offer of a retail DC solution which offers people getting their £50pm can get at the capital if they need to. For some people a default that offers the flexibility of a cash back feature is a big winner when it comes to value for money. If you have £115,000, £230,000 or more, there is likely to be some cash accessible.

This introduces a third dimension in the value for money, flexibility and features. WTW’s Lifesight master trust has an average pot at retirement of £200,000 while the average master trust may be closer to the average £40,000.  £11,500 is more Nest than Lifesight. Lifesight is more £230,000 – the value of the State Pension (today but not tomorrow!)

Will Lifesight (for instance) offer CDC and flexibility from its CDC so people can walk away (as they will at Nest)? I’m talking about a pension in payment that can be transferred or cashed out once in payment.

But any saver, whether rich or poor can opt-out of pensions before being defaulted if they choose. They can  choose another way to get paid in retirement than the default decumulation offered them for their pot.

I can live with pensions for all, so long as opt-outs and transfers exist and the Guidance Guarantee is put in place – as it should have been in 2014 but ended up a nonsense in MaPS.

We need a new Guidance Guarantee, I suggest that we need a Value For Money assessment for any saver at retirement based on what is important to them – rate and increases- security and/or flexibility. 

It will need to be specific to the choices available to people and there will need to be tables people can look at to work out who is offering them value for their money. People will have different criteria, they will need the guarantee of information and more digital guidance. I do not suggest that phone and even meetings can’t be made available but it’s not the way we make important choices these days.

We need comparative data on value for money for the “Guidance Guarantee” to mean much. It should be an extension of the pension dashboard helping people whether choosing or accepting defaults.