What caught my eye this week.
I noticed an article in This Is Money [1] 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 [2] 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 [3]. (The article above cites a nicely balanced one of its own [4] 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 [5] 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 [6].
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/public 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 our 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 [7]
How Warren Buffett got rich – Monevator [8]
From the archive-ator: Types of entrepreneurs – Monevator [9]
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 [10]
…and the economy is suffering a slump in exports to the EU – City AM [11]
Average energy bills to fall 9% in July – Guardian [12]
Small pension pots will be automatically merged under new plans – Pensions Expert [13]
Bakery chain turns its 400 workers into owners – BBC [14]
More than £800m of state pension underpayments identified – Standard [15]
IMF urges baby boomers to keep working into their 70s – Independent [16]
Zopa Bank doubles profit amid IPO speculation – City AM [17]
Warren Buffett’s Berkshire Hathaway now owns 4.89% of the entire US Treasury bill market – Barchart [18]
[19]
Unrealistic trade demands put US recession probability at 90% – Apollo [20]
Products and services
How can investment platforms offer such high rates? [Search result] – FT [21]
Nationwide’s new Best Buy mortgage rate is 3.89% – This Is Money [22]
How to save money on overseas transfers – Which [23]
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this link [24]. Terms apply – Charles Stanley [24]
More major lenders relax their mortgage borrowing rules – This Is Money [25]
Are NS&I’s British Savings Bonds worth opening after rates rise? – Which [26]
The wedding racket: how tying the knot became so expensive [Search result] – FT [27]
Get up to £100 as a welcome bonus when you open a new account with InvestEngine via our link [28]. (Minimum deposit of £100, T&Cs apply. Capital at risk) – InvestEngine [28]
Help to Save expands to offer £1,200 in bonuses to more people – Which [29]
Can you really buy a Birkin direct from a Chinese factory? [No…] – GQ [30]
How to grow £1.50 supermarket basil into a bush – House Beautiful [31]
Quirky converted homes for sale, in pictures – Guardian [32]
Comment and opinion
Give your kids money now, not later – Of Dollars and Data [33]
The rise of UK property guardians: “I like quirky and offbeat” – Guardian [34]
How market turmoil made low-volatility stocks great again – Morningstar [35]
The Holy Trinity of assets – A Teachable Moment [36]
Signs of hope in Labour’s top-secret plan for new towns – Guardian [37]
A stupid decision to sell a rental property – FIRE v London [38]
All-in US TIPS, with yields at 30-year highs? [Very US but interesting] – Economic Matters [39]
The secret fees behind $9.7 trillion in ETFs – Morningstar [40]
Costs count: the trouble with accessible factor investing [Research] – Alpha Architect [41]
Naughty corner: Active antics
Thinking the unthinkable about US assets – Behavioural Investment [42]
How do typical individual investors research stocks? – Larry Swedroe [43]
The best and worst assets to own after a bear market – Trustnet [44]
Kindle book bargains
A Man for All Markets by Edward O. Thorp – £0.99 on Kindle [45]
Million Dollar Weekend by Noah Kagan – £0.99 on Kindle [46]
Great Britain? by Torsten Bell – £1.99 on Kindle [47]
The Moneyless Man by Mark Boyle – £0.99 on Kindle [48]
Environmental factors
How much does it cost to insulate a draughty British house? – This Is Money [49]
Ghost forests are growing as sea levels rise – Ars Technica [50]
Elon Musk-backed XPrize just doled out $100m to carbon removal projects – Fortune [51]
Wood-burning stoves to be allowed in new homes despite concerns – Guardian [52]
Robot overlord roundup
The many fallacies of ‘AI won’t take your job, but someone using AI will’ – Platforms [53]
More-than-human science – Aeon [54]
Image generation: 2023 and now… – Tom Tunguz [55]
…and why taste matters more than ever – Fast Company [56]
Our messed-up times mini-special
The rise of the infinite fringe – The Verge [57]
Slop world: how the hostile Internet is driving us crazy [Search result] – FT [58]
An autopsy of American exceptionalism – Cullen Roche [59]
Not at the dinner table
Martin Wolf on Trump’s shakeup of the global order [Podcast] – OddLots via Apple [60]
How the Republic falls – Democracy Americana [61]
The US labour force over the last 150 years – A Wealth of Common Sense [62]
Trump’s war on measurement… – ProPublica [63]
…and the scientists trying to save their data from deletion – BBC [64]
Silicon Valley got Trump completely wrong – Vox [65]
A trade war with China is a very bad idea – Atlantic [66] [h/t Abnormal Returns [67]]
Off our beat
Conjuring imaginary creatures – Nautilus [68]
DuoLingo: its next move is teaching chess – VentureBeat [69]
Always invert – The Better Letter [70]
Treadmills are out, barbells are in – Guardian [71]
The last letter – Aeon [72]
Enough is Enuf [73] by Gabe Henry – Guardian [74]
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
Like these links? Subscribe [75] to get them every Saturday. Note this article includes affiliate links, such as from Amazon [76] and Interactive Investor [77].