Buck Bond Group

When I get older, losing my hair, many years from now!

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Gary Crockford

According to Age UK, one in six people over the age of 80 have dementia and only 43% of those with dementia have been diagnosed. Dementia is a progressive disorder that affects how your brain works and in particular the ability to remember, think and reason. Dementia is not a consequence of growing old but the risk of having dementia increases with age.

Pension freedoms introduced in April 2015 have changed the way consumers access their defined contribution pension pots at and during retirement. Drawdown has become twice as popular as securing an annuity and thus a guaranteed pension for life. Far too many people are making life changing decisions about their defined contribution pension pots without taking proper advice. Many of those not taking independent advice will immediately take 25% of their pension pot as tax free cash and then, without shopping around, put the balance in their provider’s drawdown product without adequately considering their options. The Association of British Insurers say 94% of non-advised drawdown sales are with existing providers, but where advice is taken only 35% stay with the same provider, the rest have found a better deal elsewhere (approximately 60% of people who did not take advice, even assuming a drawdown product is right for them, could have done better).  The advent of pension freedoms was supposed to herald product innovation, but with so little movement amongst those not taking advice there is little incentive for the market to come up with anything other than a limited drawdown product.  It can be complicated to shop around, for example charges can be opaque, not easily comparable and complex.  If you have ever tried to swap your gas and electricity supplier you will know how there is no industry standard and you need to be a rocket scientist to understand the various different figures provided by the utility companies.  Pension savings are currently like that, and taking advice from an independent financial adviser authorised by the Financial Conduct Authority is probably going to be money well spent.

Once in a drawdown product, you will also be expected to manage your own investment and withdrawal strategy, but will you minimise the tax payable, not miss out on investment growth and not run out of money during your lifetime?  Many people don’t appreciate that high early charges or withdrawals can have a significant detrimental impact on future income.

The government’s automatic enrolment flagship, generally heralded as a success, and which has seen thousands more people saving for retirement runs the risk of running onto the rocks at retirement.  First, an awful lot of people are going to be genuinely surprised at the size of retirement savings needed to deliver even a basic level of retirement income.  People generally consistently underestimate their life expectancy.  If you want to draw £10k a year in pension for example, and you live for 25 years, basic maths will indicate that pension savings of less than £100k is not going to last very long.

But let’s assume you have saved enough to be comfortable in retirement, thanks at least in part to automatic enrolment, plus you chose a drawdown product (and following reading this article you sensibly shopped around for the best product available), what investment strategy should you have, and how much should you draw in the early years so you don’t run out of money later in life?

If you are not sure, then you will by no means be alone.  The success of automatic enrolment so far has been based on inertia.  People just don’t engage with pensions.  The government correctly bet on the fact that if you automatically put someone into a pension scheme they will not opt-out.  Then once in an automatic enrolment scheme people again generally don’t have a clear idea what to invest in. NEST is a workplace pension scheme set up to facilitate automatic enrolment. 99% of its customers are in default funds, again because they don’t or can’t engage in the investment decision in the accumulation phase.  We have seen at retirement that people who don’t take advice are likely to immediately take 25% of their defined contribution pot as tax free cash and then invest the remainder in the current provider’s drawdown product.  So how can we expect those same people to suddenly engage in pensions at retirement, make the right decisions on when and how to draw benefits, and if a drawdown product is right for them to select the proper investment strategy and maintain active supervision of that policy way beyond their 80th birthday, when sadly one in six of them is likely to suffer from dementia?

This is one of the topics actively under consideration by the Financial Conduct Authority whose Retirement Outcomes Review is concerned that poor choices can lead to consumers missing out on investment growth, being exposed to investments which are too risky for them or running out of their pension savings earlier than expected.  A government which has relied on inertia in the accumulation phase (during which those of working age had a least a chance of engaging with pensions) to make a success so far of automatic enrolment, now needs to protect those unwilling or unable to engage in pensions in old age from their inertia in the decumulation phase, which must happen as the government can’t afford politically to let automatic enrolment fail.

Taking personal advice from an authorised independent financial adviser before making life changing decisions on your pension saving and during your retirement will help stop any worrying about whether your investment strategy is the correct one. Otherwise be careful that your own decision making ability isn’t the biggest risk to your money in retirement.