The £30,000 pension timebomb as savers are left to kind their very own retirement: RUTH SUNDERLAND
Beyond the furore over the Chancellor and the Office for Budget Responsibility, there are neglected long-term issues that will profoundly affect our lives if politicians continue to sideline them.
I highlighted one of these last week: The plight of NEETs, the young not in education, employment or training.
At the other end of the age spectrum, the Institute for Fiscal Studies (IFS) has now drawn attention to a looming problem that has received far too little focus.
This is the challenge facing older adults who must manage the pot of money they have accumulated in a defined contribution pension – one linked to the stock market – as they move into the later years of retirement.
At this stage of life, cognitive decline becomes increasingly common, leaving many struggling to oversee their investments and ensure a steady income.
According to the IFS, eight to ten years after cognitive decline is first detected, people’s wealth is around £30,000 lower. The reasons are not precisely identified, but separate research shows that the risk of financial mistakes rises with age.
Challenge: Older adults must manage the pot of money they have accumulated in a defined contribution pension
Financial institutions and advisers are well aware of the concept of the ‘vulnerable customer’, and the better ones take real care to protect clients. Cold comfort when around nine in ten people do not have a financial adviser.
Earlier generations were in a different position entirely. Many enjoyed a pension with a guaranteed income for life, linked to their salary when working, with automatic increases to keep pace with inflation.
These defined benefit schemes, however, are fast becoming extinct in the private sector. Future generations of British pensioners – people who spent their working lives in the wealth-creating parts of the economy – won’t have a pension at all.
Instead, they will have a pot of money built up in a defined contribution scheme which they must somehow convert into a reliable income for their old age.
The initial solution was to use that pot to buy an annuity: A product that provides a set income for life.
But annuity rates plunged in the low-interest era, and although they have improved somewhat, they remain unattractive to many.
This leaves millions of people wrestling with how to manage their retirement finances so that they neither run out of money before they die nor deprive themselves unnecessarily through excessive caution.
It is a complicated task even without cognitive decline. To do it well requires the skills of an investment manager in deciding what assets to hold, an actuary – or perhaps a fortune-teller – in estimating how long one might live, and a tax accountant to stay on top of the complicated and constantly changing tax rules.
All of this is before one even begins to tackle the administrative burden, which is formidable and frustrating.
In this context, the ‘advice gap’ is a ticking time-bomb, particularly for those with relatively modest pots. Ideally, people would begin working with an adviser in their fifties or earlier and map out a whole-of-life plan.
Public sector employees in pension schemes are largely immune from these concerns, as most enjoy defined benefit pensions funded by taxpayers.
The demise of such schemes in the private sector can be traced back to Gordon Brown’s pension raid – even without Rachel Reeves’ recent attacks on salary sacrifice, stock-market linked pensions are a poor substitute.
The notion that millions of people can manage without access to proper financial advice is, frankly, for the birds.
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Former pensions minister Sir Steve Webb is This is Money’s expert columnist, answering your questions about pensions and retirement.
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