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Cass Business School warns Govt on ‘reckless’ pension reforms

The Government’s “reckless” pension reforms risk thousands of retirees running out of money in their old age as it is “impossible” for individuals to manage longevity risk, a report by Cass Business School warns.

In a paper published today, Cass Business School’s Pensions Institute director David Blake – who is leading a Labour pensions policy review – is calling for a decumulation product to be developed to avoid a fallout from the radical changes to pension taxation announced in the Budget.

Blake says: “In his bid to offer freedom of choice, the Chancellor fails to recognise the key risks associated with every pension scheme.

“The optimal running down of assets in retirement is extremely complex. A minority of individuals might be able to manage some of these risks on their own, but this is a risky and high-cost strategy.

“The Chancellor must understand that it is impossible for an individual to manage longevity risk, except in extreme cases of terminal illness.” 

The report says individuals tend to significantly underestimate their life expectancy, with men outliving their pension pot by an average of five years and women by an average of three years.

Blake says there is a need to move away from retail decumulation products, such as individual drawdown and retail annuities.

He says: “It is essential that the decumulation stage of a defined contribution scheme is institutionalised in the same way that auto-enrolment has institutionalised the accumulation stage, rescuing pension savers from the high-charges and poor investment strategies of retail personal pensions.

“In a similar way, economies of scale need to be exploited in the decumulation phase to enable good value drawdown products to be designed for the early stage of retirement and good value annuities to be designed for the later stage.”


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There are 13 comments at the moment, we would love to hear your opinion too.

  1. Well I’m glad that the Cass business school has made this announcement, but what on earth took them so long? You don’t have to be a bleedin’ professor or an MBA to have twigged this within 5 minutes of the Budget announcement.

    If this is the level of expertise we have to rely on no wonder so much of our retail financial services provisions are in such an awful mess.

    Indeed in most cases drawdown should be referred to as Drawers Down – as that is what it will feel like for many when they run out of funds.

  2. I’m getting a little irritated with various members of the “Establishment” wittering on about the Government playing fast and loose with people’s pension pots. According to the ABI, the average annuity purchase in 2013 was less than £36,000. The median was around £20,000, so half of all annuities sold were below that figure. Half of annuities therefore produced a pension of £20 a week and less. Frankly the annuitant would have got more utility out of their pot by spending it on the holiday of a lifetime.

    Freeing up today’s pension pots doesn’t damage the fabric of society. It may even produce an economic boost. The more important point is to think about the Generation X retirees (now aged 30-50) who have probably not been saving enough, and Generation Y who will have limits to saving imposed by Student loans etc. Workplace pensions and guidance thereon will be paramount.

    Compulsory saving has to be on the agenda, not constraints on spending.

  3. Umm !!!

    Is there a fine line of; never getting your money back or running out of money ?

    I know for most people they would rather run out than loose ? and anyway if some-one has the foresight to save what’s wrong with them calling the shots on what to do with it, and that in no way implies that they will go out and blow the lot.

  4. @Graham Bentley

    Compulsory saving – yet allow people just to blow it willy-nilly and then rely on the state? Not much of a plan is it? What about the reduction of debt? Have you forgotten that individually we are one of the most indebted nations on the planet?

    I do agree about the small pension pots, but that could easily have been achieved by increasing the Triviality limit to (say) £75k and leaving everything else alone.

    I have to agree with the Cass Business School when it comes to the larger pension pots and as I said on many occasions I believe Drawdown to be a con that benefits advisers and providers more than clients, an accident waiting to happen and the likely cause of a multitude of complains in the future.

  5. Graham Bentley 16th June 2014 at 3:40 pm

    Let me make this argument – State Pension is my right, since Beveridge’s social insurance model 70 years ago. My contributions are my entitlement. I could argue it has been a moral right since the Old Age Pensions Act of 1908. I’m going to get it whatever I do with any surplus savings.

    This is not about modern day spendthrift slackers living off the state, versus wiser (or is that just wealthier) heads with more apparent self-control. There has always been an impossibility about a benefits policy designed to remove income poverty without disincentives, and at low cost. We are fortunate to live in a society where we care enough to provide social insurance. We just struggle with funding.

    A £200K annuity pot buys me a guaranteed ~£200 a week. The guarantee costs me £200,000. I’m not stupid, I know I need more than the state pension, if only to keep Mrs B in the manner to which she’s become accustomed. But the annuity, at these rates, IMHO isn’t worth the guarantee. So why can’t I be given advice that might allow me, for example, to buy a series of higher quality corporate bonds (not funds), and hold them to maturity, giving me a higher yield and (likely) my money back? Why can’t I make a sensible decision (with advice) that allows me to weigh up the benefit of that guarantee?

    It’s my money, I should be able to do what I like with it, but then it’s up to product providers and advisers to make me “an offer I can’t refuse”. And hopefully one that means more of my money circulates through the economy, to more than just my benefit.

  6. @Graham Bentley

    In think I can answer that without going into fine detail.
    1. Regarding your theoretical £200k (after PCLS presumably). Is that the entirety of your saving? If so why did you put everything into pension? You know we have untrustworthy Governments so spreading it to (say) ISAs and bonds as well may just enable you to have greater flexibility.( I accept they may change the rules on these too).
    2. What annuity rate do you presume? How does this compare with your Corporate Bonds.? Agreed some Corporate bonds (if you bought them early enough) could yield around 7%, but the net redemption yield may be an entirely different matter. Do you really want to be paying for advice (and trying to understand it) in your dotage?
    3. Weighing up the advice and making a sensible decision will greatly depend on the honesty of the adviser. How much is the fund management charge? How much is the platform charge? How much are the dealing charges? And what will your adviser charge? If you add that all up it will not be that short of 2%. If you want a 7% income that rather demonstrates a 9% growth rate. Oh yes? Guaranteed?
    4. What about Mrs B. If you peg it before she does, she will need advice on the pot. Hopefully it will still be about £200k. She will then no doubt buy the hated annuity, as not doing so will cost her dearly in tax.
    5. Of course you might be sensible (as a white collar worker) and decide to retire somewhat later than 65. You will then get an escalation of 10.4% on your State pension for every year of deferment. You might take your tax free cash next Autumn and avail yourself of the deal of the decade and buy the ,maximum Class 3A Voluntary NI contributions and enhance your State Pension by a further (indexed) £1,300 p,a – a return of nearly 6%. By the time you take your annuity, interest rates may well have gone up, you will of course be older and you may possibly be an impaired life – so you may be seeing a rate (in joint lives – 100% spouses pension) of 6% or a little more. You will then free yourself from the (high) cost of ongoing advice and management charges.

    If after all that you still think this chimera of freedom is such a good thing, then upon your head be it – this adviser will not be counting on you as a client!

  7. Graham Bentley 16th June 2014 at 5:45 pm

    That looks like detail to me…Just to be clear, the £200k is an example, given that was the expected drawdown amount to help qualify for flexible drawdown. I’m fortunate enough to have put my money where my mouth was/is, and ‘saved hard’ for the 37 years I’ve been in the industry. But this isn’t about me, or the likes of us…

    And I have a financial planner by the way, not an investment adviser. That bit’s easy (for me)…

  8. No, I wasn’t being personal. This was just following your example and presuming this as an anonymous example. I too have put my money where my mouth is. I haven’t yet taken my pension, but I plan to take my PCLS very soon just in case the so and so’s change the rules. I will then leave the balance. I will eventually take a joint life annuity – as will my wife when she finally vests. (She too will take her PCLS ASAP)

    Combined we have a very reasonable amount in pensions, but this is exceeded by our ISA and Bond savings. I therefore anticipate that only a very small proportion of our individual retirement income will be at HRT, although we have both benefited from HRT on the premiums. Most of my clients have done likewise. I believe on ‘leading from the front’. As far as I’m concerned it is precisely about the likes of us – my clients are not that dissimilar. What is the point of tying yourself in knots for those who don’t have the wherewithal? Sure they should be encouraged – or better still be very aware of what will befall them if they don’t shape up. I am not a believer in compulsion. What I do believe is that those who can and are able should be given every incentive. It is they who (as ever) will support the impecunious through the tax that they pay while working and in retirement.

    The UK still pays the lowest State Pension in the OECD (bar Mexico) which is pretty disgraceful. |Perhaps we should consider that charity begins at home and work out where we can cut other expenditure. Perhaps raising tax is a more honest approach than making saving compulsory. Provided as always we can trust a Government not to waste our money – a tall order!

  9. Sorry Harry I am with Graham Bentley on this. Average pension pot UNDER £30k, best thing is take it ALL out, pretty quick. Arguably a purchased life annuity is theoretically better than a CPA, in practice the rates have been terrible for years.
    I am all for annuities in THEORY, in practice they were broken.

  10. Phil

    I think you may have missed my comment at 7.22pm

  11. Phil

    oops – I meant 2.09 –

    “I do agree about the small pension pots, but that could easily have been achieved by increasing the Triviality limit to (say) £75k and leaving everything else alone.”

  12. Harry has the overriding gist for the way this story will play out. At this stage the national money purchase pension book is quite easy to forecast short term. Age 55 average potsize c.£35-40k. Trivialise those up to£30k, TFC from anything else, with drawdown to suit circumstance and marginal tax rate. Pick up any massive GARs and ill health enhancements that may or may not work. That leaves larger residual funds to Harry’s disliked drawdown lottery. In fact these are often not primary pots – many are medical, academic, polymath additions to large DB entitlements. This is the area to be fought over and nurtured.

    But what do I know?

  13. Harry – I didn’t miss it. You may recall that until the budget I was pushing for an increase in the trivial limit to 3 or 4% of the LTA. I am staying queit as I don’t want a govt backtrack on the budget announcement as I think it is good for my clients.

    Just waiting for one of my apprentices to come out of his R01 exam (hopefully he has passed as it means he will be consciously incompetent to advise on mortgages as from today if so. If not its CF1 on Friday) I went with him to I could sit the CII RB1 as they would not recognise my banking exams so made me pay for a study manual (I didn’t read) as well as the exam. 2 hour exam me 27 mins so I thought I better check my flagged questions which took me to 44 mins. Passed….. no excuse for FCA and bank staff not sitting this or a similar exam and it becoming mandatory bearing in mind it is nearly 30 years since I did my banking exams and I didn’t even get on the accelerated training program cos I was Fick (or was it I asked to many questions!

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