Ever since George Osborne sat down at the end of his Budget speech in March, our industry has been abuzz with talk about the retirement market and the opportunity to revolutionise pensions.
Providers now have the scope to develop all-new, all-singing, all-dancing products to fund retirement and exploit the new found flexibility. Armies of product developers have squirrelled themselves away, dreaming up new devices to provide retirement income, only emerging blinking into the light to take on board whichever specific detail of the actual regulation has been drip-fed to them that week.
For advisers, there is the prospect of a whole new audience for their expertise. Having lost all those clients they deemed not valuable enough after RDR, they can now anticipate a load of new, lower-value punters who will be delivered, pre-prepared to them if they can just secure a slice of the market for the proposed guidance/advice/nudge/whatever that will be imposed on everybody at retirement.
However excited all sides of the industry might be getting, it is impossible to channel that excitement into anything tangible or useful until the terms of the set-up are finalised. But even then, the major flaw is that, unfortunately, all of the exciting developments are predicated on the assumption that people at retirement will have sufficient savings to take advantage of these revolutionary new opportunities.
The benefits of these changes are entirely focused on those who have managed to save and not the overwhelming majority who haven’t.
In reality, there is an enormous gulf between the haves and have-nots, the size of which was underlined recently when recent Nest research identified £15,000 as the minimum amount people would need as an annual income to fund a comfortable retirement.
At today’s rates (and in today’s annuity-dominated market) you would need to accumulate a pension of around £260,000 to achieve that level of income; ABI figures suggest the average pot currently is just £36,800, which would provide an annual income of barely £2,000 at today’s rates
Auto-enrolment will go some way to fixing this, but will take some 50 years - time for an entire working life - before we see the full benefit. Until then we will see many disillusioned retiring workers wondering why they bothered saving 1 per cent of not very much for their last decade in a job.
You would need to accumulate a pension of around £260,000 to achieve a comfortable retirement income; the average pot currently is £36,800And even when we have had time for a generation to have gone through their entire working lives with auto-enrolment, there will still be a sizeable handful who will have opted out. By the time they sit down for their five minutes of guidance, they will find their situation every bit as hopeless as the majority do now.
The issue is that, while most people recognise there is a problem, very few have any real grasp of the sheer size of the numbers involved in the shortfall.
The scale of the challenge we are facing was brought home to me when I recently watched the ‘game’ show Deal or no deal. I don’t know if you have seen it yourself (I don’t in any way recommend you do; I do this sort of research so you don’t have to) but in case you haven’t, the show features ‘ordinary’ people opening a series of boxes. In performing this perfunctory task they are routinely interrupted by phone calls from an unseen actuary offering them money to stop.
The little drama there is is derived from waiting to find out whether the contestant will accept more money than they have in their box. I say ‘drama,’ for me any intrigue is quickly replaced by annoyance at the general public’s inability to grasp basic laws of probability.
I am being unkind, their inability to judge the true value of the boxes in front of them is probably more a result of their inability to understand the true value of money at all than a lack of understanding of statistical theory.
The people on the show routinely talk about sums of around £15,000 as “life-changing”. To the man or woman on the street, such an amount might seem hugely significant but the reality is it would barely fund a year of the comfortable retirement to which the masses are apparently aspiring. If a life is 80 years, £15,000 would barely change 1 per cent of it.
The show’s top prize of £250,000 (which is much more than I have ever seen anyone win) would not be enough to secure the £15,000 annual income that is only deemed “comfortable”. Not “luxurious” or “opulent” as we might want to aim for.
Anyway, this overestimation of money’s worth is a typical view. These are the people that changes to retirement landscape should benefit first. We need to improve education and understanding of how far money goes in real terms rather than let people get blinded by the fact an amount is significant, just because it was handed out by a former DJ on a glittery TV set.
The pensions revolution is great. The introduction of enforced advice even better. But if we could push all people to get advice early enough to realise how much they need to do before they retire, that has to be the ideal.
