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Embarking up the wrong tree

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&#39t register with him. It&#39s 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&#39s 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&#39s 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&#39s 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.

Perspective, p24;

Decision trees, p36

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