Have we lost the hearts and minds of our clients when we talk about pensions? The public's perception of pensions and providers is at a very low ebb. I see more clients about buy-to-let mortgages in connection with retirement provision than about pensions. Is there any way that we can get back their confidence and enthuse the pension industry with some energy?
The problem is that pensions have been made too complicated. After all, a pension is nothing more than a form of saving to provide income in the future when you have stopped working. The product should be regarded as an investment and the two most important aspects of any investment are security and net return. This is precisely where current providers and products have let the public down.
This has led to the public focusing on the least important part of a pension – the cost. There is so much focus on the cost that people have lost sight of the whole point of a pension and that is to provide the best possible net return.
I often use a scenario with clients where I tell them they can buy a Mini or an Aston Martin. Which would they most like? Most clients would choose the Aston Martin but say they can only afford the Mini. I see my job as trying to give them the performance of the Aston Martin at the cost of a Mini. Therefore, I must try and find a balance between cost and performance. If I fail to find this balance and focus too much on one rather than the other, the client will lose out.
My feeling is that the pension industry has focused so much on cost that it has lost this balance and has therefore lost the confidence of clients, who only see problems regarding security of their pensions and performance.
To cap it all, the Government has introduced a pension product which provides no return to the industry for a number of years. Stakeholder has been an unmitigated disaster. IFAs hardly ever sell it or recommend it to clients, providers cannot make any money out of it and clients do not buy it because, as one client put it to me: “What's the catch?” If it is that cheap, there is something wrong with it. If you pay peanuts, you get monkeys.
So how do we get confidence back? How do we persuade clients that a buy-to-let purchase is not the only answer to providing income in retirement? I believe that the proposals for pension simplification from A-Day on April 6, 2006, are perhaps the best changes that this Government has ever announced to any financial product. The simplification of pension rules is, I believe, one of the greatest confidence boosts that the pension industry has ever seen.
At last, we are getting back to the core of a pension policy – an investment product which is designed to provide income in the future. No more pedantic rules about the percentage of income that can be put into a pension, just simple funding rules. No more rules governing one set of pensions which are completely different to the rules governing another type of pensions. No more incompatibility, just one simple set of rules that govern all types of pensions.
Allowing pensions to invest in areas that have previously been restricted, such as residential property and works of art, will mean that we can have greater diversity of investment within a pension fund and allow some of the buy-to-let portfolios already built up by clients to be brought within the pension regime.
Some people in the industry have made a hoo-hah about the lifetime limit. I do not know about you but within my portfolio of clients there are only likely to be two who will even come remotely close to breaching the lifetime limit and, in any case, if they do get near the limit, I will cap it by putting them into drawdown.
While I agree that this is against the principle of maximising a pension fund, the lifetime limit is not a problem for most clients. I have seen one calculation which estimates that only the top 3 per cent of earners will ever breach the lifetime limit.
I have not been a great supporter of this Government's legislation when it comes to the financial services sector but I applaud it now for this simplification. I am looking forward to advising clients in the environment that will exist from 2006 and, in fact, I have been contacting my clients and talking about these changes.
I see it as the most positive piece of legislation that we have had in 20 years.
John Winful is a partner at Winful Associates