Research conducted on behalf of the FSA into statutory money purchase illustrations has proved what most people believed beforehand:
more knowledge about one’s precarious state of long-term savings might actually encourage some additional savings.
This result is based on consumer reaction to three main messages derived from the illustrations tested, the FSA says:
However, the FSA has missed a crucial point that should come before any mention of income, inflation or retirement planning.
Before consumers or providers can actually start to forecast income, or the effects of inflation, or what annuity rates might be in future, they must also understand that they original money saved may go the way of the dinosaurs, without any recourse to a safety net.
Surely the whole point of SMPI is to boost transparency in order to encourage greater savings, yet that process is lost if consumers are not told of the primary risk their money still faces before reaching "pension income" stage.
If consumers are to understand risk, then they must be taught all the risk factors.
Future Pension Protection Fund legislation notwithstanding, if the point of the research was to test consumer understanding of the application of current legislation and regulations in terms of illustrations, then they should also be told in an honest fashion by providers - who are to issue the documents - there can be no guarantees as to the safety of original capital invested.
This is the very reason for bringing about the PPF in the first place, so why deny the presence of a risk factor – that of pension schemes going bust - in the documentation being tested?
It is one thing to say that income in retirement will not be guaranteed, quite another to leave consumers without the knowledge their savings could disappear well before they are even close to drawing an income and with limited compensation recourse if things do go wrong.
Yet again, it seems those setting the rules have set the agenda for consumers, rather than listening to what they themselves want to know.
Consumers will take on risk if they feel is acceptable to their individual situations. However, it is a sure bet that consumers would at least like to be told of the risk their savings could disappear if a pension scheme goes bust ahead of being told of possible rates of return on their hard-earned savings.
If there were no risk of schemes going bust, then there would be no need for the PPF.
Incidentally, the risk of not getting one’s original capital back is one that also applies to defined benefits.
Such benefits are only as good as the promise of a company’s continued existence.
For example, if Rolls Royce went bust tomorrow, those making additional contributions into its well-known pension fund would be unlikely to get the retirement income they hoped for, let alone the additional contributions.
Remember, pensions are deferred income with some tax advantages. In themselves they do nothing to insulate members of schemes against the ups and downs of global or local economies or poor management running well-known companies into the ground – remember Marconi?
Unless consumers are treated like adults and given a frank assessment of all the risks to their savings, they will likely continue to look towards other means of savings, such as buying property.
Notwithstanding interest rates, buying property means income is not deferred and money is invested in something tangible to the saver. Money put into bricks and mortar also benefits from tax breaks in the UK – such as the ability to sell one’s home without paying CGT.
Also, unlike pensions, consumers can purchase insurance to ensure that a property bought is protected from risks: a house can be damaged by flooding, but its value can be protected. A pension scheme can go bust, but the consumer cannot get insurance against the value of their share in the scheme decreasing or even disappearing altogether.
Consumers understand these risks and rules, and regulators should ensure the same is true of pensions.IFAonline
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