A reading of the CP18/17 associated with the Financial Conduct Authority’s Retirement Outcomes Review, finds that “someone who wants to drawdown their pot over a 20 year period could increase their expected annual (retirement) income by 37 per cent simply by investing in a mix of assets rather than just cash.”
Many encashments were the direct result of engagement. The consumer received a letter from their provider with information on the new pension freedoms, and they literally seized the opportunity.
Most did this without consulting an independent financial adviser or any of the government-sponsored guidance services.
And nearly all of them made this move to their financial detriment as inflation is now eating away at their cash pile at a rate of between 2.5 per cent and 3.5 per cent, depending on where inflation is sitting, and the measly rate offered by their bank’s account.
For many of them, a little knowledge has indeed proved a dangerous thing. I read an article in one financial trade magazine recently that indicated that the pension dashboard, should it ever arrive, offers yet another route to poor decision-making.
The argument ran: “Pensions are now so complex, the average consumer has absolutely no chance of being able to interpret dashboard results with any confidence. Just imagine they relied on the information. Think of all the ways they could go wrong.”
Although the sentiment might appear patronising, this adviser may well be right that lots of people are likely to see their shiny new pension dashboard-provided digital display of all their pensions assets. And, without properly considering the valuable benefits within older defined benefit and early DC plans for example, begin consolidating their retirement savings into higher-charging plans, perhaps attracted by buzzy advertising.
I call this ‘the hockey stick of engagement’ effect. As the government, providers and advisers begin a new process of engagement – perhaps via a new digital platform or email communication linked to regulator-enforced increased transparency (for example, the new Mifid II-linked quarterly investment report or digital ‘wake-up’ pack) – they need to be conscious that the little extra knowledge they are delivering might trigger poor decision-making.
Time-poor savers need expert advice
Consumers need to decide what type of saver they are. I think the majority sit in the ‘time-poor’ camp. For their own good, this group needs to understand that they either can not or will not devote enough time to properly get to grips with their savings.
This group needs to let go. Despite attempts to engage them, they need to leave things to the experts. For those that can afford one, that means a professional financial adviser. For the rest, they should leave matters to the trustees of their workplace scheme, or to their employer who will have chosen default schemes and default investment funds, having themselves taken professional advice.