What caught my eye this week.
I noticed an article in This Is Money this week featuring a reader upset that their pension hadn’t been life-styled into lower-risk assets as they’d hoped.
Instead, they wrote:
…my money remained in a fund rated moderate-high risk/high reward until March 2020.
At this point, I realised what had happened and asked for the switch to be made manually. The same month, I asked for my pension date to be moved forward five years to March 2025.
Shortly after, the stock market plummeted due to the pandemic and I am now entering retirement with a shortfall in my fund.
Judging solely on the facts presented, you can see why the reader is aggrieved.
The pension provider seems to have sent out literature describing a de-risking process that was never going to happen to this person’s fund, due to it being from some earlier vintage. Hence the confusion.
What’s more, the reader tried to take evasive action themselves but that ultimately come to naught too.
Apparently the case was investigated by the Financial Ombudsman, and the pensioner provider was not found to be accountable. I won’t second guess that ruling.
However there’s a bigger picture lesson here. It’s reminder that today’s pension freedoms so beloved by the likes of us Monevator types have come with downsides.
Not everyone wanted this job
Trying to manage a defined contribution pension – the biggest lump of money most of us will ever get near to – is daunting enough for most people when it comes to their saving and investing years.
But when it runs into the trickiest problem in finance – the switch to drawing down your pot – the risks multiply faster than you can say “who let the 47th into the war room?”
Only a couple of years ago, the papers were writing horror stories about the dangers of life-styling pensions after the big bond rout. (The article above cites a nicely balanced one of its own from 2022).
But now global equities have wobbled, it’s understandable that some near-retirees might instead be wondering why they didn’t have a bigger safety cushion.
Unlucky for some
People underestimate how hard this conundrum is to resolve, because we want to believe in certainties.
But in my view it’s not even necessarily that the pension providers – or the investors – should be doing anything different, even though with hindsight there will always have been an optimum course to follow.
Rather, it’s that individuals are running into the maelstrom of sequence of return risk and the complexities of drawing down a pension as, well, individuals, rather than spreading the risks with others as under the defined benefit pensions of old.
We might understand some people will see their pensions plunge before retirement because they took too much risk. Shrug and say that’s on them.
Stock market crashes happen. These guys rolled snake eyes.
But, firstly, the typical person isn’t (sadly) a hyper-aware Monevator reader. And secondly, there but for the grace of God and all that.
Terribly unlucky things can happen in the stock market. Both to individuals and to entire countries and generations.
While the analogy isn’t perfect, you might as well say an overweight person should have seen their heart attack coming even while you splutter through your own deep pan pizza and play the percentages with your own arteries.
We’re not going to go back to defined benefit company pensions.
But thinking about all this, it’s easy to see a case for bigger private/pension partnership pensions – where millions of members together smooth the sequence of return risks.
The case for no-hassle annuities looks stronger these days too, as a way of simplifying drawdown.
But again, that’s because payouts are currently pretty good. If taking out annuities becomes all the rage and yet we slide back into a low-rate era again, you can guarantee that trend will overshoot the new reality.
Armed and dangerous
I sometimes wonder if we write too much about pensions, drawdowns, and so on these days. I just about remember being young, and I’m sure it’s all a bit off-putting to anyone under 40 who stumbles across Monevator, compared to if they saw an article about the fun stuff.
But this constellation of issues is why we keep returning to – or even belabouring – the subject. A little knowledge combined with a lot of responsibility for your own retirement is a dangerous thing.
We can try to do own own small part to address the knowledge deficit.
But the heavy personal responsibility part is here to stay.
Have a great weekend.
From Monevator
What’s the safe withdrawal rate danger zone? – Monevator
How Warren Buffett got rich – Monevator
From the archive-ator: Types of entrepreneurs – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
The UK government borrowed almost £15bn more than expected last year… – Sky
…and the economy is suffering a slump in exports to the EU – City AM
Average energy bills to fall 9% in July – Guardian
Small pension pots will be automatically merged under new plans – Pensions Expert
Bakery chain turns its 400 workers into owners – BBC
More than £800m of state pension underpayments identified – Standard
IMF urges baby boomers to keep working into their 70s – Independent
Zopa Bank doubles profit amid IPO speculation – City AM
Warren Buffett’s Berkshire Hathaway now owns 4.89% of the entire US Treasury bill market – Barchart
Unrealistic trade demands put US recession probability at 90% – Apollo
Products and services
How can investment platforms offer such high rates? [Search result] – FT
Nationwide’s new Best Buy mortgage rate is 3.89% – This Is Money
How to save money on overseas transfers – Which
Get up to £1,500 cashback when you transfer your cash and/or investments through this link. Terms apply – Charles Stanley
More major lenders relax their mortgage borrowing rules – This Is Money
Are NS&I’s British Savings Bonds worth opening after rates rise? – Which
The wedding racket: how tying the knot became so expensive [Search result] – FT
Get up to £4,000 when you transfer your ISA to InvestEngine our link. (Minimum deposit of £100, other T&Cs apply. Capital at risk) – InvestEngine
Help to Save expands to offer £1,200 in bonuses to more people – Which
Can you really buy a Birkin direct from a Chinese factory? [No…] – GQ
How to grow £1.50 supermarket basil into a bush – House Beautiful
Quirky converted homes for sale, in pictures – Guardian
Comment and opinion
Give your kids money now, not later – Of Dollars and Data
The rise of UK property guardians: “I like quirky and offbeat” – Guardian
How market turmoil made low-volatility stocks great again – Morningstar
The Holy Trinity of assets – A Teachable Moment
Signs of hope in Labour’s top-secret plan for new towns – Guardian
A stupid decision to sell a rental property – FIRE v London
All-in US TIPS, with yields at 30-year highs? [Very US but interesting] – Economic Matters
The secret fees behind $9.7 trillion in ETFs – Morningstar
Costs count: the trouble with accessible factor investing [Research] – Alpha Architect
Naughty corner: Active antics
Thinking the unthinkable about US assets – Behavioural Investment
How do typical individual investors research stocks? – Larry Swedroe
The best and worst assets to own after a bear market – Trustnet
Kindle book bargains
A Man for All Markets by Edward O. Thorp – £0.99 on Kindle
Million Dollar Weekend by Noah Kagan – £0.99 on Kindle
Great Britain? by Torsten Bell – £1.99 on Kindle
The Moneyless Man by Mark Boyle – £0.99 on Kindle
Environmental factors
How much does it cost to insulate a draughty British house? – This Is Money
Ghost forests are growing as sea levels rise – Ars Technica
Elon Musk-backed XPrize just doled out $100m to carbon removal projects – Fortune
Wood-burning stoves to be allowed in new homes despite concerns – Guardian
Robot overlord roundup
The many fallacies of ‘AI won’t take your job, but someone using AI will’ – Platforms
More-than-human science – Aeon
Image generation: 2023 and now… – Tom Tunguz
…and why taste matters more than ever – Fast Company
Our messed-up times mini-special
The rise of the infinite fringe – The Verge
Slop world: how the hostile Internet is driving us crazy [Search result] – FT
An autopsy of American exceptionalism – Cullen Roche
Not at the dinner table
Martin Wolf on Trump’s shakeup of the global order [Podcast] – OddLots via Apple
How the Republic falls – Democracy Americana
The US labour force over the last 150 years – A Wealth of Common Sense
Trump’s war on measurement… – ProPublica
…and the scientists trying to save their data from deletion – BBC
Silicon Valley got Trump completely wrong – Vox
A trade war with China is a very bad idea – Atlantic [h/t Abnormal Returns]
Off our beat
Conjuring imaginary creatures – Nautilus
DuoLingo: its next move is teaching chess – VentureBeat
Always invert – The Better Letter
Treadmills are out, barbells are in – Guardian
The last letter – Aeon
Enough is Enuf by Gabe Henry – Guardian
And finally…
“We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.”
– Warren Buffett, Berkshare Shareholder Meeting 1998
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“Not everyone wanted this job” Tell me about it! And the pension providers make it a nightmare. I’m a long term Monevator reader (for which I am eternally grateful – and I’d like to think therefore I’m pretty savvy about the whole field) , managing my, and helping partner and mother manage, DC pension pots – I am constantly driven close to foaming rage by the p**s poor access to information, employers changing providers, scheme provider being different from investment manager, providers switching investment managers and therefore switching funds , with no history carried over, inability to remember login details because it’s a new portal from a new provider. Let alone the inability to use any tools to compare fund performance because they are always ‘special’ versions of funds you can’t easily look up.
And why does my DB pension send me an annual statement about who they are giving pensions to, and how well funded it is, but dont automatically give me a rough forecast of my own future entitlement (ie the indexing)?
Literally this morning my wife was trying to understand why the contribution allocation she had set on her DC (to a cash fund – we really are getting close now,..) only seemed to apply to about 1/3 of the money going in , because the rest had a strange contribution type that she couldn’t direct via the website – so thats a call next week to somebody in a call centre who doesnt really know what they are talking about to try and fix it – and she only noticed it by chance.
Apologies to all for the rant – for some reason when the sums concerned get large, I get a little tense……
@AboutToPressTheButton That! When I retired with a DB scheme (superceded in the nineties). I left on a Friday and automatically got my first payment a few days later. (There being no link between salary payday and pension payday you could get paid twice in the first month).
My wife however is, like you, struggling with how to access her pension. There’s no easy flow chart. And she rightly resents paying a financial advisor to sort out what should be easy. She might swallow a flat fee. But no way a percentage.
Hope yours works out.
Strikes a big chord with me! I breezed through the internet crash and the GFC confident my 60/40 portfolio would get there in the end – a six figure salary at the time makes things a lot easier – human capital. Accumulation was so easy in hindsight!
But 9 years into retirement I agonise over more bonds? linker ladder? annuities? less US? Perhaps I have too much time on my hands!
I console myself that after 9 years my cumulative investment returns are 2x my withdrawals. So sequence of returns been in my favour I guess. Arguably I should spend more.
But even this “orange wobble” – which viewed on an Apr year-end basis sees my 2024/25 results as a 1.8% gain total return, so hardly a disaster! – sends me scurrying off to check my strategy.
I have friends with traditional annuities from company pensions and others with inflation-linked public sector pensions where the possible demolition of the US & Dollar led world order is just a current affairs topic! It’s hard “doing this job” – but tiny violins in the big picture.
I’ve contacted my pension provider repeatedly with a simple question. They offer life-styling. I want to know whether the strategy for life-styling is premised on someone buying an annuity, or someone going into drawdown.
Surely they must know.
Each time, I get fobbed off with a long-ish email full of vague information-for-beginners – but no answer to my question.
It makes such a big difference. As someone wanting to annuitise, I need to understand the level of risk as the date approaches. Unfortunately their fund structures are so opaque that the fund fact sheets don’t help either.
Not sure what else I can do. Write directly to the trustees…?
@ Haphazard – all schemes are required to have an internal dispute resolution procedure (IDRP). You could think about raising a formal complaint under that arguing that the scheme’s communication on this point isn’t up to scratch and re-iterating your question. It might not be quick, but your complaint should be considered by someone with a bit more experience, and it might even prompt a rethink of how they explain things in their member communications.
the transition to whole of UK on DC pensions must be a disaster waiting to happen right? DB is such a better approach for almost everyone. They just need to adjust the generosity dial?
Maybe the disaster is happening but slowly?
Had similar issues with lifestyling. I have mentioned it twice to the pension rep that I wanted to retire early – by email and in video call – and wanted the lifestyling adjusted accordingly. Every year, each statement suggests I will be retiring later than I indicated, and the fund allocation appears to suggest the same.
I found managing my own DC pension mostly OK during the accumulation phase — during which I had to use employer’s chosen provider/platform — but I did get to choose assets classes and funds. However they were deeply annoying at times and I nearly had to use the ombudsman to get them to let me do something complicated with Pension Input Periods that their own literature said was the only option available to someone in my position, but they finally relented. They even (to my surprise) let me do “scheme pays” when it was sadly required.
But I moved everything to SIPPs as soon as possible and these platforms are in my experience massively more flexible and informative, and it’s a shame I couldn’t use them for our DB pensions (as I did for our ISAs) much earlier on.
I’m massively happy that whole “nannying” of DB, inflexible funds, annuity as the only option, and (even when drawdown first came along) GAD limits, is mostly behind us. People should have control regards what they do with their money, and yes, this does mean some people may make bad choices, or just uninformed or unlucky ones.
> and yes, this does mean some people may make bad choices, or just uninformed or unlucky ones.
Probably most people. I know too many over 50s all in cash, their only saving grace is thy have some part DB, and usually a full SP NICs.
BoE inflation calculator tells me £5.75 twenty years ago needs £10 now. It’s not unreasonable to expect a 20 year retirement. £4.94 30 years ago equals £10 now – an early retiree could expect a 30 year retirement, though I suppose they are less likely to have an ‘in cash I trust’ attitude.
But, but but – stock market = casino they say…
The link above about 30y TIP yields has caught my attention. The author claims that Stephen Miran, who wrote a US government report detailing a plan to restructure the US debt some people claim to be the idea behind a possible Mario Lago accord, was his student.
He mentions several plausible reasons why the probability of the US defaulting on TIPs or manipulating CPI in the future would be remote. But he fails to mention that the chance of the US defaulting on TIPs is larger than that of defaulting on conventional treasury bonds. Any government can always pay conventional bonds issued in their own currency by printing money but this fails when the bond is inflation linked.
According to this paper I’ve found in the Atlanta FED website, the recovery rate for TIPs might be 18% lower than that for conventional Treasury bonds:
https://www.atlantafed.org/~/media/Documents/research/seminars/2019/hsu-021919.pdf
@Tom-Baker Dr Who
I suspect another factor would be the US debt ratios for fixed-rate and index-linked bonds. If the majority of the debt is in fixed-rate bonds, than printing currency is still a (short) term solution.
I do wonder whether employer dc pensions if they haven’t been changed to take into account pension freedom could be the next misselling scandal.
The employer is no longer trustees of the scheme in most cases but could there Be an argument they have a duty of care to their employees?
I work on commercial insurance side of financial services but often discuss pension arrangements and there’s alot of smaller employers who have gone down the nest route and I do wonder about future liabilities if staff don’t have adequate retirement funds (leaving aside that minimum auto enrolment won’t get them there anyway)
Also @ermine yes my dad since returning to the UK is completely in cash . Net worth of £3m (£1m in property) age 73 probably spends 50 to 60k a year he says he doesn’t need to take risk of investing.
I can’t decide whether he’s right or foolish
@Fatbritabroad
Well he isn’t going to run out of money before he dies so long as he doesn’t rquire a Nursing Home. I’ve seen the argument for staying in Cash, but in reality thought you need to have a very significant pot to do it or be so much later in life and not end up in a Nursing Home that you could be safe!
You say under-40s might be bored by pension talk. I’m mid-30s and spend a lot of time thinking about my pensions, as do my similarly-aged colleagues albeit to a lesser extent. Most of us have little confidence the state pension will exist in a useful form for us, and we discuss pension plans openly at work in a way that I doubt would have been common for earlier generations. I think gen X will have it worst but millennials and gen Z are already pessimistic enough we will be caught less by surprise by our pension predicament. Although there will still be a large cohort who understand the problem but are too poorly paid relative to cost of living to avoid it
Small typos – “do own own” and “private/pension partnership pensions” (private/public?)
FT article on the rise of AI slop is timely. I can’t count the number of times I’ve clicked on a link only to find AI generated fluff content and shiny but completely soulless illustrations with zero artistic merit. Makes me value this weekend round up even more with every one of these pieces written by a human who cares – typos and all.