The UK pension market is worth around £2.4bn. Mintel’s 2021 pensions research found 37% of adults wanted to set up a new pension plan in the next two years.
On the flip side, individual pension product sales have been in long-term decline due to the restrictions of receiving the income and tax-free cash, and the complexity of pension regulations and taxation. Other investments, particularly Isas, are on the rise.
However, during the height of the Covid-19 pandemic there has been a temporary boost in new pension plans.
The impact of auto-enrolment as well as the plethora of online self-service propositions will undoubtedly continue to influence investor behaviour.
Someone moving to a collective DC pension won’t know what’s happening to their work pension
It is time for marketing campaigns tasked with educating people that investment performance in pensions matters more than anything else.
This is where the investment houses should step up because they have both funds and expertise. Sadly, the operating costs and additional regulatory responsibilities mean some have no appetite for hosting their own Sipp platform.
New opportunity
There is, however, a new opportunity for investment houses that do not want to market their own Sipp investments.
From August this year, we will see the introduction of collective defined contribution (DC) schemes that pool members’ contributions, share longevity risk and offer a target income based on contributions and investment assumptions.
A draft paper on collective DC pensions was issued in January by The Pensions Regulator (TPR), which — like any regulatory body — wants to get ahead of potential issues. Specifically in this case, the Brighton-based authority wants to confirm collective DC pension providers are ensuring members understand all pension communications they receive, as well as the investment and retirement income variance risks.
The boost in pension pick-up during the pandemic is a positive thing, but we must ensure people understand these changes
As a lifelong financial adviser, I know the chances of the public understanding a new collective DC pension, governed by hundreds of pages of legislation and tax law, are remote. As for investment risk, very few understand risk and the impact it has on returns. The fact that collective DC pension income will rise and fall is the major risk of the new pension.
You just have to look under the bonnet, and take into context the wider economic situation, to understand why.
When writing this article, I looked closely at target date funds over recent years and the performance of some is erratic, to say the least. As target funds move towards the retirement date, the percentage of bonds held increases, on average to around 50% of the investment close to retirement.
It is time for marketing campaigns tasked with educating people that investment performance in pensions matters more than anything else
Bonds have been adversely affected by central bank signals that interest rate rises are drawing closer, sparking a steep bond price decline. I leave it to you to study the inverted bond yield curve assumptions, then make your own conclusion whether a majority holding of bonds is currently the right or wrong way to invest in a retirement date fund.
The opportunity for equities, as hopefully we see the global pandemic reclassified as an epidemic, could be considerable in both growth and value terms.
Those working at TPR believe collective DC pensions have the potential to change the pension landscape. They could continue to receive greater traction as defined benefit (DB) pension trustees and managers look at collective DC pensions for their thousands of members, to lighten their own responsibilities.
Matters for concern
However, I still have concerns. For instance, I worry the person moving from a DB pension to a collective DC scheme will have no idea what’s happening to their workplace pension. They also may not be aware of the loss of the ‘gold plated’ guaranteed income from their existing DB pension scheme, which is no longer offered for future contributions.
Those working at TPR believe collective DC pensions have the potential to change the pension landscape
For some consumers, this could mean real change, and it is important that those affected understand what it could do to their financial situation.
The boost in pension pick-up during the pandemic is a positive thing, but we must ensure people understand these changes and which factors ultimately are influencing their retirement income.
Kim North is managing director at Technology & Technical
This article featured in the March 2022 edition of MM.
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You must be joking, I have not been asked by any client nor refereal this centry to set up a new pension, I am repaeatedly asked to deall with clients list of many Auto enrollemnt pension , set up by the “All Caring” employers, even those over 60!!! We should abolish Pensions complety, After all, the only incentive is the Up Front Tax relief, taken back in taxing the income!!! So lets not obfuscating the truth, LISA and ISA is all the vast basic rate earners need, If I am not correct,, please answer this,,,,, Why is it that anyone with less than £30,000 at retiremnet,,,, without advice, can have the lot back after tax…. Now how stupid is that.
Comparative projections of ISAs vs. (DC) Pensions consistently and irrefutably show the latter, with the benefits of tax relief at one’s HMR on contributions, to deliver better levels of retirement income, especially if that income is below the higher rate threshold.
Don’t forget either the PCLS, Salary Sacrifice and the advantageous treatment of monies payable on death. How can you POSSIBLY think that ISAs represent a better deal than this?
I believe Robert referred to Lifetime ISAs not just standard ISAs Julian?
He referred to both, but LISAs were designed primarily as tax-assisted savings plans for first home purchase, not retirement income savings plans (though they can be used as such).
They’re also input-limited to £4,000 p.a. (any excess doesn’t qualify for the tax benefits), any employer contributions are treated as taxable remuneration and only 12 providers offer them.
how many clients have you got putting £400 a month away!!! Not to many I think,,,When I start saving the normal retiremt age aws targeted at aged 50, then it was/is 55 now it will be 57 or 10 years prior to Satre retiremnet age how can you possable recommen putting cash into the Auto Enrllment funds baed upon possably fity years savings,, Pleae name me a provider who has been around for that time and who will want to ” Consilidate” these unviable contarct anyway,
Undoubtedly there is too much complication around pensions. As far as communication is concerned surely it is just a case of telling clients that a pension is merely an investment with certain knobs on. While I have sympathy for Robert Milligan’s views, I personally feel that AE does the employee little good. Restricted fund choice and very poor individual advice – if any. Better to have made personal pensions compulsory. And yes, apart from PCLS a pension is a poor tool for a basic rate payer. Unless of course the employer contributes. Significantly.
I can’t completely agree with Julian. It would seem that he deals mainly with basic rate payers. But for those who pay higher rates of tax it only makes sense to contribute an amount that ameliorates their HRT liability and to be careful no to put them too deeply into HRT when they take the benefits. The margin should be taken up with ISAs and at a current £20k a married couple can double this. Then the yield is tax free as is any trading or encashment. If there are still resources, the much maligned and underused Insurance Bonds prove a useful addition. (Although less and less providers now offer them). After all a max. 5% tax deferred income for 20 years is not to be sneezed at; with current interest rates nowhere near that. Of course, this also assumes a sensible retirement age – say 68 or 70. You even have the opportunity of some gains, particularly if you take less than the 5% (and still well above current interest rates) It isn’t beyond the bounds of possibility to have a very substantial retirement income and yet pay minimal tax. Pensions are by no means the be all and end all of retirement planning. (Although I wouldn’t recommend handbags as a viable option -the weekend essay).