Those of a younger generation might not remember this, but there was a time when for many people the most popular form of long distance travel used to be hitchhiking.
Nowadays many people worry about being picked up by, or giving lifts to strangers. But 30 or 40 years ago, if you were skint, did not own a car or just had time on your hands, hitching a lift was a better option than a bus or a train.
Of course, the trick was to pick the right lift. I still remember being totally lost at a junction miles from anywhere, with barely half a dozen cars passing me over the next hours. What should have been a one day journey, at most, from A to B left me spending the night in a hedge before resuming my trip the next day.
Millions of pension savers must feel a similar sense of being completely adrift when trying to work out the best options for their retirement.
As Money Marketing has repeatedly reported in the past year, one of the side-effects of the Government’s relaxation of the pensions rules has been to create more potential confusion for would-be retirees.
This is particularly evident when it comes to drawdown products. According to the Financial Times last week, drawdown sales have rocketed since the relaxation of the pension regime in April.
The paper reported that, according to data from the Association of British Insurers, almost 19,000 drawdown products were sold in the second quarter of 2015. This is equal to the same number of drawdown products sold in the whole of 2013.
What also appears to be happening is that, whereas once upon a time, drawdown was considered an option primarily for savers with in excess of £100,000 – some used to say £200,000 – in their pension pots, many providers are reducing this requirements to £30,000 or less.
Talking to some advisers last week, what appears to be happening is many savers keen to access some of the tax-free element of their pensions are electing to switch their funds into drawdown products, which make such a withdrawal easier.
They are currently choosing not to take any additional income from their pots and intend to leave the rest of their money fully invested for the next 10 years or more.
Arguably, a key concern about drawdown was over the potential to take too much of an income at the start of a person’s retirement, leaving not enough for later years.
If so, under the scenario described to me by the advisers I spoke to, the risk of making a catastrophically unwise choice – as opposed to just a poor one – is less likely.
But that still leaves open the issue of the opaque charging structure of many drawdown products. The FT’s own investigation found a bewildering array of costs, including set-up charges, annual lump sum admin fees, plus percentage charges on the total lump sum under management. One or two drawdown providers also levy a withdrawal charge when people want to take some or all of their tax-free cash.
Comparing providers’ drawdown products, even ones where the underlying investment is looked after by the same fund managers, is fiendishly complex. Yet the options available to those searching for the best solution to their needs are limited.
At this point, I can already sense one or two advisers sharpening their quills to inform me that, of course, this is a logical consequence of the “advice gap” caused by the RDR. The Government’s new Financial Advice Market Review will, of course, solve this problem.
Except that this is emphatically not a problem the review was set up to solve – and nor will it. In the absence of many providers’ inability to offer simple and easy access to savers’ tax-free cash, many are opting to switch into more complex products that can deliver the same thing – but at a cost that is difficult for them to calculate.
Whereas once upon a time advisers took a leading role in exploring the annuity market on behalf of clients about to retire, drawdown often involves even more complex research. Yet the product itself is being touted to a new market advisers do not want to bother with. Nor will banks or other direct salesforces.
Meanwhile, Pension Wise is slowly turning into a service whose limited number of users are finding difficult to understand in its present form, where one generic – and tightly scripted – session is all you get. How else do we explain the growing call from Citizens Advice, who are managing the face-to-face service, for Pension Wise “customers” to be offered two meetings instead of just the one?
When the pensions system was liberalised last year, many commentators described the reforms as a “revolution”. If so it is an incomplete revolution, where key elements that might allow more sensible decisions to be made by savers are not yet in place.
For example, ways for consumers to make informed decisions on the basis of some form of standard charge illustrations that offer total cost comparisons for pension pots of different sizes.
As I discovered when hitchhiking many years ago, the next best thing to a lift that will get you out of your predicament is a clear map. The FCA needs to step up and provide one for drawdown products.
Nic Cicutti can be contacted a firstname.lastname@example.org