Here is the paragraph from DWP that could mean most to those using the Pension Dashboard (IMO)
20. The Department for Work and Pensions (DWP) is working closely with the Financial Reporting Council (FRC) to explore the development of standardised approaches to pension illustrations, including for common forms of decumulation and for individuals in decumulation. These approaches would support clear and consistent communication of expected retirement income for default pensions. The inclusion of FRC milestones within the roadmap reflects this joint work and the importance of illustration standards in underpinning the delivery of Guided Retirement.
This is picked up by Richard Smith.
I expect “paragraph 20” will become a matter of sustained interest over the next two years!
I suspect that “expected” may include “estimated”. The only thing that can be guaranteed is a fully insured solution – an annuity. CDC is providing an expectation that is a an estimate and retirement guides will deliver a final income (likely a deferred annuity) at some later stage. The amount of annuity is both an expectation and an estimate.
What we will have initially (assuming a kick-start for the dashboard next year is a SMPI based on level annuities and everything else providing some form of inflation proofing.
Since the cost of increases in retirement can be half of the payment in retirement, the difference between SMPI and inflation proofed income is just wrong as a comparison. It’s also misleading for people who will be led to the initial income rather than an understanding of how “real” that income is. By “real” , I mean protecting money as it is eaten away by inflation.
There are of course varieties of inflation protection. The best is the triple lock of the State Pension and the second best a guarantee of full RPI inflation-linked annual increases and behind this various versions of SMPI include the fixed cap of occupational pensions at 5%. Depending on the value of a guarantee, the SMPI inflation target is either better or worse than a guaranteed increase.
The important thing is that only SMPI has no increase in the income year on year but – oddly – it will be the way “pots are converted to pensions” on the dashboard.
If you’ve been following my blogs today, you will know that I am fixated by the conversion of pots to pensions. I think it is a problem, Bill Sharp’s nastiest hardest problem in finance.
As Andy Young, we ought to have some consistency on what people can expect- even if only an estimation!
Nice blog Richard Smith! The sooner we can get rid of SMPI – the better
