Absolute Nonsense

Here’s a lot of nonsense about pensions.

Automatic enrolment is half way through and success is pretty much in the bag. Nonsense. We’re about 5m people into a 10m target population, but we’ve got less than 50k employers staged, with over 1m to go. The challenge ahead is very different from that which has gone before.

We need to introduce higher contribution rates now to ensure people have adequate pensions at retirement. Nonsense. We probably will need higher rates in due course but it could be an ill-timed gamble to do anything until we’ve worked through the phasing up to 8%.

Customer service and administration are entirely commoditised and therefore not a differentiator. Nonsense. If all service was good, then that might be the case. Try telling an adviser that it’s much of a muchness when they’ve spent a chargeable hour waiting for someone to answer the phone

A provider’s commitment to the market is irrelevant, as long it offers a good proposition now. Nonsense. Once a provider stops investing in its proposition and loses interest in continuing to do particular lines of new business, the incumbent users of that proposition start to see things decline.

After April, people will blow all their money on Lamborghinis. Nonsense. Some people will undoubtedly spend some of their money, or even all of it where small amounts are concerned, but most people – I believe – will think carefully when they realise the magnitude of their decisions.

Retirement is all about maximising income. Nonsense. It often was, whether maximising annuity or drawdown income, but that’s all changed. For most, it will now be about making the pot last, and maximising income might be the worst thing for some people.

The Guidance Guarantee is a waste of time and no-one will use it. Nonsense. It will serve as an important interaction to ensure people – at the very least – make informed decisions. I think many will subsequently seek advice. More people than do now

The only advice option for people with small pots is online, and that won’t work. Nonsense. Online advice could never replace full independent, face to face advice, but it may be the only affordable option for many people. And it will emerge, even if it takes a year or two

People shouldn’t be able to access drawdown without advice. Nonsense. Drawdown won’t be – for the masses – what it once was. For many, it will just be about accessing tax free cash early; it seems disproportionate to insist someone takes advice if that’s their only request.

We shouldn’t accept transfers from DB schemes where the advice is not to transfer. Nonsense. While the advice will be hugely valuable, it can’t act as a power of veto or else it becomes a liability for the adviser. Instead, it ensures people make informed (indeed, advised) decisions.

The biggest risk for people is poor value products.

Nonsense

Here’s my attempt at the hierarchy of risk people face.

The biggest risk for people is that they give all their retirement money to criminals and lose the whole lot. The second biggest risk is that they suffer an extraordinary tax charge. The third biggest risk is that they run out of money too soon and fall back on the State. The fourth biggest risk is they lock into a product that isn’t well suited to their needs, and there is no option to change it further down the line.

The fifth biggest risk is that no-one accepts the equation of risk vs return, and people invest with too much or too little risk.

The new pension freedoms have the opportunity to be a really good thing. However, if people aren’t adequately supported in their decision-making then a very different picture could emerge. This is a big social experiment, and we – the ‘industry’ – are tasked with making it work. For the tiny little part I play in it, I take that responsibility very seriously.

But then maybe I’m just talking nonsense.

 

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2 thoughts on “Absolute Nonsense

  • Jamie

    In the 1980s the Govt introduced personal pensions and encouraged people to transfer into them. They may have even been a TV campaign. My wife (then a nurse) gleefully transferred out of the superannuation scheme, the adviser stating that it was an expensive scheme. This was the norm and, as I say, generally encouraged by the Govt.

    We all know about the subsequent ‘pension scandal’ and 25+ years of expensive redress. A Govt promoted idea has cost millions if not billions to the industry.

    Now the current Govt has said anyone wanting to transfer out of a DB scheme with a TV of above £30k must take advice from Pension Wise or a regulated adviser.

    What if these new freedoms, this ‘social experiment’ turns out to be a disaster? Perhaps a change of Govt results in a change of rules and people look back and think they maybe they shouldn’t have given up that guaranteed income after all. And maybe they’ll seek redress against the firm that advised them to. PI firms will no longer cover, or premiums will rocket for those that did (and those that didn’t). Firms go bust, meaning the few left have ever increasing FSCS bills.

    All this has actually happened over the last decade from the last Govt led pension ‘miselling’ scandal.

    In the knowledge of the business-ending potential of giving this advice, how many quality IFA firms will be happy to sign that report advising a person to transfer out of a DB scheme?

    How many clients will get angry at their adviser and move to another firm, perhaps one set up for the purpose with less long term servicing intentions, who will give this advice. How many of those firms will take the profits out, then wind up the company and allow the redress to fall onto the FSCS.

    In short, Jamie, how can you possibly implore the IFA community to help make this work when we are so clearly being lined up to take the brunt of the fall out if it all goes horribly wrong? That seems like nonsense to me.

    Reply
  • Chris,

    Firstly, thanks for your very considered comment.

    I find it hard to disagree with you, to be honest. There is clearly a demonstrable systemic risk in that someone subsequently changes the rules and deems that the advice previously given no longer seems the best. Indeed, the changes already made through the Budget could mean that is the case for some people now, and subsequent changes in tax relief or simply wider taxation of income could give rise to a similar situation.

    But clearly advice can only be provided on the basis of what is known at any given point in time, with the warning that things might change. I wholeheartedly agree that this needs to be recognised (if I infer your point correctly).

    You mention that ‘I implore the IFA community,’ although I’m unsure if you mean that the Government does? My point is more to do with the value of advice in general, which I believe in and seek to champion in all my public engagements. While also acknowledging that I am neither an adviser nor an expert on advice.

    But then I maintain my caveat that I may of course be talking nonsense!

    Jamie

    Reply

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