There has been a lot about pensions since the budget bombshell, particularly in the financial press.
George Osborne plans to allow savers to take their entire pension pot as cash when they reach age 55.
He also said that the Government is consulting on proposals to introduce a face-to-face at-retirement guidance service for all Defined Contribution (where the pension depends on how much you put in, rather than on your salary) pension scheme members.
One of the things being said (and it wasn’t a prank, although it came out on 1st April) was that there would be a “skills gap” in providing advice, particularly if that “face-to-face” idea is actually implemented.
So Brooks Newmark, the Conservative MP for Braintree said, “It still seems to me there is going to be a gap in terms of the number of people and the quality of advice that is going to be needed, and which could leave the potential for errors and abuses.
MPs were apparently “grilling”, the Director General of the Association of Professional Financial Advisers, Chris Hannant.
There were lots of reasonable points made, which is pretty unusual for a group of MPs.
Hannant said that if “everyone who is retiring next year was to seek full advice there would be a challenge on capacity.”
Which is almost certainly true. Of course, he added that this was a challenge for “the advice sector to become more efficient, and that advice could be delivered more cost effectively through the use of junior staff who are overseen by fully trained advisers.”
That, on the basis of 30 years or so of experience a couple of degrees, a couple of post-graduate degrees, financial planning qualifications, being a registered supervisor etc. is a pretty good plan for causing chaos and giving some awful advice.
But surprisingly, to me anyway, Newmark said: “It still seems to me there is going to be a gap in terms of the number of people and the quality of advice that is going to be needed, and which could leave the potential for errors and abuses.”
Very sensible, as was the enquiry from Andy Love, the Labour MP for Edmonton who “asked whether lower cost advice channels could help fill the gap between advice and guidance.”
But my award for the best comment was, as quoted in the Money Marketing article, from Syndaxi Chartered Financial Planners managing director Robert Reid, who said, “At long last people are being treated as adults – we just have to hope they behave as adults.”
And that’s the point. We don’t have to hope they act like adults – if we did it’s a forlorn hope because people don’t behave like adults about money (at least, they don’t behave logically, maximise their resources, prioritise sensibly, behave in accordance with their goals and plans or behave in a way even remotely resembling how we imagine adults do).
The emphasis in all these ideas is on the money, the question posed being, how can you maximise post tax income?
And that might be important. But what people choose to do is now more open. It used to be that you had to buy an annuity (basically, an annual income) and you couldn’t have the money until about sixty or older, now it’s a lot easier to take lump sums, you can take the money earlier, you’ve got a lot more options.
And we know that having more options makes choice harder, not easier. We also know that faced by too much or too complex choice people won’t make a decision at all.
And we know that, as Caroline Rookes, chief executive of the MAS, said about a survey they commissioned last year, ‘Millions of people could escape their spiral of debt by accessing free advice. However, this study presents us with a fundamental challenge: the majority of people with debt difficulties do not seek advice.”
That rather puts paid to the apparently sensible idea of Andy Love about low cost channels. You can give people free advice (let alone low cost) and they won’t use it.
Because the real problem is that it’s the wrong sort of advice. Not that the financial advisers are bad, I used to be one, and I know the majority work very hard to help their clients and to give them the best advice they can.
The problem is that what everybody is focussed on is the technical stuff about the money, maximisation of income. That’s useful, but it’s not really much help unless somebody knows what the person actually wants from their money.
You can try to sort out different ways of getting the pension out and maximise what they’ve got at a given age, but what if they really don’t need that because they’re going to do part time consultancy, or if they want to have a big holiday while they are young enough to enjoy it rather than maximising their income for the next 20 years?
What people actually want is to get the life they want. But nobody seems to be concerned about how to help them to work out exactly what that is, and what money, when, would best help them achieve it.
The money side of pensions is pretty complicated. But compared to the human brain, the single most complex thing in the known universe, pensions are laughably simple.
So what we could do is to train the “junior” staff that Hannant mentions, the “low cost channels” that Love suggests, the MAS staff that Rookes manages to help people behave like we fondly imagine adults behave.
That would mean that people would know what they actually wanted, and they’d be able to be relatively specific about the way that they wanted their retirement income to go, and they’d have a good idea of what “maximising” the value of their post tax income would be for them. And that would make the job of the advisers a lot easier, they’d be using their technical skills to aim at a defined target, rather than trying to produce some sort of magical answer that would work for everybody.
And we could even try to educate people about retirement and pensions. Not about the technical details, tax and so on, but about lifestyles, choices, happiness, fulfilment – things that are actually important to people and that you may be able to use money to help with (or may not). Because if they know about those, they know what they want from their money.
It’s pretty simple, are the people to be the servants of the money, or do the people make the choices, and the money is used to help them implement the choices?
The way it is, the money rules, and the people do what the money says. Does that sound adult to you? It could be changed to you being in charge and the money (with technical help on tax, pensions legislation etc.) being your tool – which would you prefer?