When even Health and Safety thinks you’re being too cautious

Carole considers the conundrum of risk and concludes that, when it comes to pensions, gin might be the answer


Those of you who regularly read the financial industry trade press will have eagerly devoured the words of wisdom on the Financial Conduct Authority’s (FCA) Retirement Outcomes Review, which….. STOP, WAIT! Come back! I was only kidding – of course you don’t. Who in the name of Regulation does that?

Reaching for the gin

Trust me, I know that the very names of these bodies and the reports they churn out is enough to make you reach for the gin. This is kind of ironic when you consider that a body like the FCA exists – at least in part – because mere consumers like you and me need protecting from a finance industry that can easily pull the wool over our eyes. If we can’t even keep our eyes open long enough to scan to the end of the name of the body that is protecting us, how can we keep on top of the issues it is dealing with?

The reality is this protection is mostly going on behind the scenes – we are protected without even knowing what the issues are. The regulator makes the rules, and the companies who deal directly with the consumers put these rules in place. Unless, that is, there is anything interesting in there. Then the press will get hold of it and make a story that appeals to us because it is heavy on drama and light on factual detail.

Addressing the lack of action, engagement and milk-dribbling debates

Which means that, if the FCA publishes a report that doesn’t make it to a news desk it is unlikely to feature in the conversation over our cornflakes. And I don’t think I’m going out on too remote a limb here if I venture that the recent publication of ‘feedback on the consultations arising from the FCA’s Retirement Outcomes Review’ failed to grip even a small number of households in a milk-dribbling debate.

A story that it suits me to tell

And yet, and yet and yet…. Within this dry old title is a story that it suits me to tell because it speaks volumes to the issues that I am trying to address in my workshops – one of lack of engagement with pension-related matters and a lack of action when it comes to investing.

Admittedly, in my workshops, I am coming at this from the angle of women – and we do represent a clear group who seem to be lagging when it comes to grasping the role of investing in our futures. But, as with any generalisation, this is also a feature that can be seen across the board. So much so that the regulator is now wanting to address it.

A blockbusting pensions drama?

So, what’s the story here? Well, back in 2015, the story was one of Freedom, Trust and Recklessness – you see how it had all the makings of a blockbusting pensions drama? The then-government took the popular route of shaking would-be pensioners free from the shackles that were stopping them from choosing how to withdraw their retirement money. It decided that it was time to trust these people to make sensible choices about their futures. So much for the Freedom and Trust element of the story.

But without a sprinkling of Recklessness, the story just wasn’t exciting enough. And so, spokespeople willing to add some spice to the narrative were rolled out to voice their fears that these new freedoms would turn huge numbers of responsible savers (who, in their defence, had been giving enough thought to their future selves to bother to provide for them in the first place) into irresponsible profligates overnight. They would – so the story went – abuse their new-found freedom by blowing the lot on Lamborghinis (or maybe Skodas – presumably not everyone could afford a Lamborghini).

And have they? Have they heck.

Too cautious for their own good

The FCA has been keeping a close eye on things to see how it would all play out and found something you might find surprising (in a relative, finance-y kind of way). Far from throwing caution to the wind and spending their personal pension pots without so much as a nod to their future selves, the actual problem that has come to light is that many of these retirees are, in fact, in danger of being too cautious with their money for their own good. Now I call that a twist worthy of an over-hyped BBC drama!

One of the FCA’s stated goals is to “protect consumers”. So when the government introduced the pension freedoms in 2015, it was reasonable to expect it to be there with its mop and bucket to clear up any unintended fallout. I wonder if anyone imagined that, far from dealing with the excessiveness accompanying a new-found freedom, it is now more concerned about those whose risk averseness – or just plain can’t-be-botheredness – is acting against their best interests.

Introducing risk to mitigate…risk

There is some detail in all of this that is worthy of a whole nutshell of its own (if you’re genuinely interested, see ‘A bit more understanding’ below). But for now, let’s just say that, at the time you come to retire, your pension pot of money is likely to be invested in very low-risk investments (like cash deposit accounts). This keeps the capital ‘safe’ from unhelpful falls in the stock market (because none of your money is invested there), but it does nothing to help your investment grow – or, in today’s low-interest-rate world, to protect against inflation.

When you retire, you might take some cash out of your pension pot, but the rest is presumably there to see you through your remaining days. So the FCA is saying is that you should consider taking some risk with this remaining pot so that you can potentially get some growth – perhaps enough to keep up with inflation, or more. You can’t be left to stick it all under the proverbial mattress out of sheer lack of interest or an unreasonable level of cautiousness. It wants the companies providing the pensions to build in a sort of a safety net to protect you from losing out on the possibility of growth in your pension. Which, in itself, involves taking some risk.

Acknowledging the risk of doing nothing

At the beginning of the very first ‘Women save, men invest’ workshop that I ran back in September, I was struck by the willingness of my lovely participants to declare investments “too risky” for them to contemplate. They wanted the sort of safety that comes from holding cash – but at the same time recognising that ‘under the mattress’ was a) not a particularly safe place to store it and b) meant it was at risk from inflation. By the end of our discussions, we came to the conclusion that there were all sorts of risk when it comes to providing for the future – including the risk of being too cautious and, in fact, of ‘doing nothing’.

For those of us who feel programmed to prioritise the day-to-day stuff over the future, financial risk can feel alien. And there is a sticky conundrum here. If you take no risk, you will get no growth and – furthermore, your money will, over time, be devalued by inflation. If you take some risk, you have the potential for growth, but, when you want to take it out, your money could be worth less than it was at the start.

What you need and when you need it

I think it all comes down to what you need and when you need it. If you haven’t got enough for what you need and you hold all your savings in a cash deposit account without adding to it, you can be absolutely sure that you still won’t have enough when you need it. If you take some risks with your money, you might. And that’s about the size of it.

As I understand it, the FCA’s job is to protect – not necessarily to educate. It leaves that to the companies providing the products or those advising consumers. But if you are someone who is not currently looking to take out a financial product – or get advice on one – I think you are unlikely to come across any of the education that you might need if you are to understand how best to provide for your future.

Unless, that is, a story comes to light that can be sensationalised into something that makes you put down your cereal spoon and reach for the nearest copy of the Retirement Outcomes Review to learn the facts. Now where’s that gin…?

3 December 2019


A bit more understanding

Desperate to understand a little more about how the pension freedoms have affected the choices available to you if you have a personal pension? This might help.

What a personal pension is: This might also be called a private pension and is a type of ‘defined contribution’ scheme that you can take out yourself and which enjoys the same tax relief on your contributions as a pension that is provided for you at work. You pay money into a pot that is invested on your behalf for your retirement. The more you pay into the pot, the greater your pension.

You might also have one provided by your employer that works in the same way, known as a group personal pension.

In the old days: You paid money regularly into your pension pot and then, at retirement, you exchanged all the money that had built up – your contributions plus any growth, or minus any investment losses – for a guaranteed ‘pension’ income that would be paid until you died (you might hear this called an annuity but most people call it their pension).

You could either:

·     Turn it all into an income, or

·     Take some (up to 25%) as tax-free cash and turn the rest into an income (this would be a lower annual sum than the no-cash option).

Those were the only choices available.

You can still take either of these options – and you don’t have to wait until you retire from work. You can start taking money out of a personal pension from the age of 55, but the earlier you take it the lower the annual pension income will be.

What people didn’t like about the old days: Because the income is guaranteed for all of your life, the amount that you get every year is relatively small. People felt they were exchanging a big pot of money for a small income and it would be many years before they had received all the money they had put in. And if they died soon after retirement, this money was lost.

In the new, pension-freedoms era: There is now a third option. This is called flexi-access drawdown and is essentially a way of having your cake and eating it, too. You can still take some cash out (tax free) if you want to, but the rest remains in a special pension account called ‘flexi-access drawdown’. You can draw a regular income from this – or an irregular one if that suits you better. The crucial difference is that the capital remains yours – to use as you wish or to pass on to the next generation, if that’s the way it goes.

The default for your pension savings is that you choose an ‘old days’ option: The sticking point here is that the companies providing your pension continue to assume that you will be taking one of the ‘old days’ options ( a full pension income or some cash and a reduced pension income) – which will mean they have to sell the investments in your pension pot in order to buy the annuity. So they move your pensions savings, by default, well ahead of your retirement date into low-risk investments (a process called ‘lifestyling’). This avoids the risk of being forced to sell at an unfavourable price just because the markets happen to be low at the time you want to retire.

What the FCA is proposing: The FCA is proposing to build in another layer of decision-making for the consumer who chooses the drawdown option. It wants these ‘pensioners’ to think about whether they keep their pension savings in the low-risk, low-zero-growth investments or whether they take some risk in order to secure some growth – particularly if they are leaving the money in the pension pot for five years or more.

How to make this happen: The regulator is asking the companies that provide personal pensions to add a step to their procedures. Anyone who chooses flexi-access drawdown – and who doesn’t have a financial adviser helping them – must be offered a number of investment pathways. Crucially, they will only be allowed to remain invested in cash – or other similar low-risk assets – if they have made “an active decision” to do so.

The nutshell: While buying an annuity at retirement remains an option today – either on the day you retire, earlier (from age 55) or later – with the pensions ‘freedom’ you don’t have to. Which means you might not be using all your savings in one go, and so some of it will need to remain invested. And this is where the FCA is worried – not in case pensioners are too reckless with their remaining pots of money, but because the position in their pension fund is too cautious. This is particularly so if the money is likely to remain invested for more than five years, when the effect of inflation will threaten the pensioners’ ability to buy themselves those Lamborghinis…