Decision trees? It depends a lot on your understanding of the word
“decision” it seems.
The sample decision trees published by the FSA really do serve to
highlight the enormous difficulties people in this country face when they
come up against our pension system.
Take some time to put yourself in the place of two ordinary people trying
to use these trees to sort out their pensions. Eric is 55 years old and an
unemployed labourer. He lives in rented accommodation, has no savings at
all, is in debt to the bank and has no life insurance. Nevertheless, Eric
feels he ought to do something about his retirement.
He gets hold of a copy of the decision trees and starts, as recommended,
by reading all the introductory stuff. He can read all the words but their
intricate meanings probably don't register with him. It's a bit like
reading an A-level maths paper.
So, he goes on to the trees themselves – the ones for those not in
employment. The first one asks him if he has any existing pension
arrangements other than state ones. He answers no. So far, so good. He now
goes to the second tree.
This one is difficult but he struggles on to the box that asks if he can
save at least £20 a month for his retirement. He wants to, particularly
because the chart shows that this willincrease his pension by £19 a month,
which will come in handy later in life. The next box tells him to consider
starting a stakeholder pension.
In real life, when he gets to 65, he will probably get something like
£67.50 a week as a state pension, £4.75 a week from his stakeholder, a
top-up of £6.20 a week to get him to the minimum income guarantee and a bit
of help with his rent and council tax from the state, too.
In effect, Eric's savings will have been taxed at 100 per cent and will
have been about as useful an investment as taking a £20 note from his
pocket each month for 10 years and setting fire to it.
Now, I know all this information is right there in the notes that
accompany the trees but it is not easy for people like Eric who are not
members of the pension priesthood to understand.
What Eric really needs is a tree that asks him the kind of questions
needed to make even a rudimentary attempt at understanding his situation,
eventually leading to a box that says: “You would be seriously stupid to
consider saving in a pension” or something like that.
It's not just Eric though. What about Barry? Barry is employed and is able
to become a member of an occupational pension scheme which provides 1/60th
of final salary for each year of service. He gets hold of the decision
trees for employed persons to check out his options.
Barry is asked if his employer offers a company pension scheme. He answers
yes. He is then asked when he can join. He answers that he can join now or
in the near future.
The tree then asks: “Does your employer pay in contributions to the
scheme?” This is a strange question really as it is illegal for employers
to set up occupational schemes and not pay in to them. But the question is
there, so Barry answers it. He answers no.
In fact, his employer is taking a contribution holiday because the scheme
is in such good financial shape. But everyone in the factory is talking
about it. They are all worried becausethe employer has stopped paying.
It's a short step from here for Barry to slip down the part of the tree that gets him taking out a stakeholder pension.
There are 60 million people like Eric and Barry in this country, all with
different personal circumstances, all needing specific individual advice,
particularly on financial issues.
To be fair, the decision trees acknowledge this. On every page, they carry
the warning: “The decision trees are designed to help you make your own
choice regarding your pension arrangements. They do not constitute and
should not be taken to constitute financial or other professional advice.
You should get help if you require advice.” Quite.
Decision trees, p36