Opinion  

With more pensions choice come more headaches

With more pensions choice come more headaches

Prior to the launch of the freedom and choice pension reforms, one of the questions regularly uttered was, ‘What if there is a stockmarket crash in the weeks and months after April?’

Well, if not quite a crash, markets have certainly witnessed a substantial correction of late. No one, we must hope, has ploughed into self-select drawdown and then ploughed into China, but any stock-driven portfolio will have suffered to some extent.

This is not, one hopes, a huge concern for advised clients who will have gone through a careful process before their portfolios were constructed. But a lot of investors may feel substantially poorer at the start of September than they did at the beginning of August.

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I tend to believe that much of the global correction is an overreaction to Chinese events – though it may also involve some markets catching up with the thinness of the economic recovery, the approach of interest rate normalisation, and valuations being somewhat out of whack with company earnings.

Overall, it shouldn’t be too much of a challenge for investors at the accumulation stage to make up given time. But what of those who are drawing down in relative ignorance of the risks of pound cost ravaging?

If we take the group that would previously have annuitised – some will have sought advice and are hopefully well-positioned, some will not actually be drawing down yet, and others presumably will be using their pots to provide post-retirement incomes.

For those in the latter group, the question is whether they are following disciplined drawdown strategies or simply taking out what they need to live on.

It is here where I part company with the consumer advocates who believe that the most urgent issue to address is charges. I would argue the most pressing concern is surely improving consumers’ understanding of both their investment rationales and the investments themselves. How many will have sensible withdrawal policies to maintain their pots, particularly through stockmarket falls?

Investment advisers may also shudder at the following hypothetical but highly probable pub conversation: someone who has cashed in and left their money in the bank is now congratulating themselves on getting out of the market while commiserating with their invested friend. Of course, while the former is certainly in the better position now, he or she probably won’t be in five years’ time.

But this dynamic highlights one of the flaws in the whole freedom and choice system – that many inexperienced people are faced with very complex scenarios that they simply don’t understand.

It is also clear we are seeing the end of what has been one of the most flattering five-year periods for drawdown possible. Some investors may be finding out that having much more control over their money can bring substantial downsides as well as new opportunities.