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How much pension can I take? A 'commune' may help

Don't worry, it's got nothing to do with tie-dyes or flares! A 'drawdown commune' is being touted as a way to cut costs and improve guidance.

 
How much pension can I take? A 'commune' may help

A ‘drawdown commune’ that helps invest your pension and tells you how much to take each year so you don’t end up in poverty is the next step in the evolution of pension freedom.

The new rules have given over-55s access to their defined contribution (DC) pensions as cash to spend as they wish and ending the need to buy an annuity. However, many will still want to turn their pension pot into income even if they do not want to buy an annuity and will be looking to invest in ‘drawdown’ policies to do so.

Jackie Wells, head of policy at the National Association of Pension Funds, believes drawdown in its current form doesn't do enough because it relies on individuals making investment decisions or on paying a financial adviser to make those decisions.

Instead she believes a large drawdown ‘commune’ needs to be created into which pensioners can transfer their savings, have it invested by a professional as part of a bulk of money, and be given calculations on how much to take each year so they are not left in poverty. She is confident that these schemes, which are being described as 'default drawdown', could be in place in the next two years.

‘There will be a growing voice [for collective drawdown] but a distinct lack of supply,’ said Wells. ‘There have been so many changes that there is no stable platform to develop something… that would work for the mass market instead of [just] the top end.’

In Wells' blueprint for pensions, ‘we would need to channel a large number of people into a small number of well-run [collective drawdown] schemes to make it work’.

Economies of scale

The benefit of pooling pension savings into a default drawdown scheme is that the money can be managed as institutional funds, meaning costs are slashed.

Wells said she expects a ‘blurring’ between drawdown and institutional investment over time.

The collective pot of money would then be invested in a way to provide returns for the long term, with infrastructure investment being one area that Wells recognised as crucial. The investment would also be covered by some sort guarantee, which would be a costly part of the scheme.

‘It has to be safe; we are talking about retirement income so it has to be in an environment where it is protected,’ said Wells. ‘We need to wrap [the pension savings] in a level of security and that will mean cost but it can be done on a big scale [so the cost will reduce].’

The key to collective drawdown would be to help retirees not just with investing, but also in understanding how much they can take from their pension. Unfortunately, many are still in the dark about how much they can take each year before they run out of money.

‘We need something that says ‘we look at investments and we think this is the best asset mix and if you take roughly this for X number of years it will be OK’,’ said Wells.

Jonathan Lipkin, director of public policy at the Investment Association, said it was too early to know whether a default drawdown scheme would work but agreed the scale of a scheme would provide investment advantages.

‘It is clear that scale in accumulation or decumulation does give you access to certain kinds of advantage in terms of asset classes you’re able to invest in and the cost of delivery,’ he said.

He added that long-term investments such as infrastructure were ‘illiquid’ and warned that a default scheme would not take into account the other pension provision that individuals may have accumulated over their lifetime.  

Annuities would play a part in the default drawdown strategy but not until a pensioner reaches a certain age or there is a trigger, such as becoming unwell, when it is worth moving out of drawdown and into an annuity.

Part of the responsibility of a default drawdown scheme would be to push people into annuities to fund the latter part of their old age.

Forced drawdown

While default drawdown 'communes' could be useful for employers and pension trustees, who could direct their employees and members to the schemes, Lipkin said they would not remove retirees' responsibilities for their pension.

‘You will always have a variety of choices that will need engagement,’ he said.

There has also been a suggestion that the government should create a default drawdown scheme for those in retirement in the same way it backed the creation of the National Employment Savings Trust (Nest) for savers.

However, Wells said the government would not take a gamble with taxpayers’ money until there was the demand.

‘With auto-enrolment there was a sizeable market,’ she said. ‘Government-backed [default drawdown] would be one way of driving the market but the taxpayer would have to fund the money to develop it.

‘[The government] needs evidence that there is consistent demand and they need to be confident about spending money in a time of austerity.’

18 comments so far. Why not have your say?

Ian Phillips

Apr 29, 2015 at 18:29

Is this really so stupid that I can't be bothered to read it all?

Let the "Government" control the "professionals" to invest your pension pot.....you're having a laugh aren't you?!

Maybe if it would be a Labour Government with the professional help of the FSA you'd be ok.........I'm wetting myself!

I wonder what salary this woman is on..................

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jeffian

Apr 30, 2015 at 01:04

Harsh, IP.

"have it invested by a professional as part of a bulk of money, and be given calculations on how much to take each year so they are not left in poverty"

sounds OK in theory but in practice the problem would be that any 'professional' would be constrained by the threat of litigation if he gets it wrong so would err on the side of caution and we'd be back with the Government's GAD figures for capped drawdown. I was already in the happy position of qualifying for flexible drawdown and have been able to both take an income well in excess of GAD and maintain/grow capital and I think most reasonably savvy people could do that. The key for those who can't is - don't do anything unless you're absolutely sure it'll be better than your existing arrangements.

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Suzie B

Apr 30, 2015 at 12:23

so jeffian, what is your investment strategy? So far I've only dared take 4% per annum myself!

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Maverick

Apr 30, 2015 at 13:01

For what it's worth, here are my experiences over the last four years.

I draw down the GAD maximum from my SIPP, which comes to roughly 8% a year. Despite that, my total portfolio - my SIPP and my ISA - has risen in value by 6.5% a year. I haven't yet needed to touch my ISA money.

My portfolio is invested about 50/50 in shares and investment trusts - which can both be seen as "collective investments".

I accept the portfolio does need a certain amount of management, but I now have the time, and still have the energy, to do that. I have no intention of going anywhere near an annuity, ever. And I'd rather make my own choices than have them made for me by an "investment commune".

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Suzie B

Apr 30, 2015 at 13:27

thankyou Maverick; so do you own any bonds or other diversifiers in your portfolio?

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AnthonyL

Apr 30, 2015 at 13:59

My experience virtually mirrors Mavericks. I started taking the maximum because at the time my SIPP would have been heavily taxed if passed on so I was going to buy ISAs with any excess income. I still might or I might let the SIPP "breath" a bit in what looks like an awkward few months ahead.

I'm all in OEIC fund, mixture of Income, Balanced (including gilts/bonds) and trackers. I have no particular idea of what I'm doing but it makes me realise just how much the annuity companies are making. I'm drawing about twice as much as I could under an annuity, my pot has grown and the pot is mine (and mine to pass on). I do have a pot of ISAs to back me up so I can afford some risk.

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Maverick

Apr 30, 2015 at 14:43

Suzie B - No bonds - My interpretation of "risk" is the money in my pot running out before I do, so low-yielding investments with an almost guaranteed capital loss at maturity in fact count as extremely risky . . . . !

The investment trusts I use to give me exposure to areas where I lack expertise or the ability to gather useful information - e.g private equity, Far East markets and foreign smaller companies. I also have quite a lot of money in commercial property, either through investment trusts or property companies.

But I must confess to being something of a "performance tart", so diversification is secondary.

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Suzie B

May 01, 2015 at 19:56

Many thanks AnthonyL and Maverick; do you have any favourite investment trust or funds you would recommend?

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AnthonyL

May 02, 2015 at 12:00

I'd feel very uncomfortable saying which are (if any) my favourite funds because it is so dependent on your own attitude to risk. I bought and kept Fidelity China (FCSS) when others were selling (not in my pension though) - I just mention it because I was prepared to "gamble" £10k and it appears now to be paying off (well 11% annualised with lots of scare factor! in between).

I think we've both said the sort of areas we are in - you need to research (see the Citywire selections - and I also use Trustnet comparisons). I don't look generally for the spectacular but if I'm choosing a fund manager then I want to see they are consistently outperforming their index.

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Suzie B

May 02, 2015 at 13:49

Anthony L; that's fine I quite understand. I do actually hold some higher risk assets and I'm happy to do my own research, but it sounds like you and Maverick are making more money at it than I am! However because I currently aim to only take the natural yield as income that limits my options to some extent.

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AnthonyL

May 02, 2015 at 16:34

Some would argue that I am overweight in equities and therefore somewhat reliant on growth as well as income. We'll see how well that holds up over the election and possible Euro exit uncertainties. Already taken a bit of a dive since my first posting here. If you are taking natural yield then I would hope you pot is gently growing.

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Stephen B.

May 03, 2015 at 12:49

The "commune" sounds like a with-profits fund by another name ...

On the question of managing your own drawdown, I think the key question is to think realistically in advance about what you would do if things go badly - e.g. imagine that we're in a similar situation to 2006 when markets are about to go down for several years. If it would just mean giving up on a world cruise or not buying the fabled Lamborghini that's one thing, but if you wouldn't be able to fund your routine living costs the risks are probably too high.

Apart from that, unless you're already very old I think you need some thought to the long term. The maximum lifespan is about 110, would your money run out before that? What if your ability to manage your investments decreases? How much do you care about leaving an inheritance - bearing in mind that an heir who's a child now may be a grandparent by the time you die!

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Suzie B

May 03, 2015 at 12:58

Its keeping up rather than growing, but I'm not fully invested yet; still 30% cash so I guess that will make a difference. Would prefer to be investing when the market is cheaper, but when that will be I don't know, and there is an opportunity cost of remaining in cash in the meantime.

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Stephen B.

May 03, 2015 at 13:09

The problem with investing when things are cheaper is that there's usually a reason why things become cheaper. Mining, oil and emerging markets look cheap by historic standards - that may represent an opportunity, or it may reflect a poor outlook. My policy is to basically stay fully invested all the time, but rebalance if things get too far away from my target weights, which gives an automatic element of profit taking from things which have risen a lot which gets reinvested in areas which are out of favour.

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Maverick

May 04, 2015 at 15:35

Stephen B - There is an excellent free website, www.thecalculatorsite.com, which allows you to calculate compound interest easily. It's worth spending half an hour or so putting different figures in.

One of the things the website tells you very quickly is that provided you can get a decent return from your investments (say 5+% per year) and don't draw down too much each month, you never run out of money. If you live to 110 you will actually be making money, as the compounding effect overcomes the amount of drawdown!

So much for insurance companies arguing that they need to keep the money from those who die young to pay for the pensions of those who die late. Total rubbish.

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Maverick

May 05, 2015 at 11:13

Susie B - As for what investment trusts I would recommend, I am very much in favour of doing your own research, but I do have one valuable tool which I use a lot.

On the same day every month I find out the percentage rises in the FTSE 250 and All-Share over the last 1, 3 and 5 years. Take the higher of the two figures.

I then go on to Trustnet, go into "Investment trusts - Prices and Performance", and find the box "Apply advanced filters" and click "Show". Put your three percentages in the "Performance" boxes and click on "Apply".

You will then get a list of the investment trusts which have beaten your standard over 1, 3 and 5 years. You can either print off the list or copy it to Excel if you want to analyse the figures further.

I also keep a list on Excel of which investment trusts have qualified this month. I have figures going back 90 months, which show that Scottish Mortgage is the champion with 62 appearances out of 90 months, closely followed by F&C Global Smaller Companies with 60, then Aberdeen New Thai with 58, Jupiter European Opportunities with 51, Biotech Growth with 48 and Finsbury Growth & Income with 47.

Bear in mind these figures show consistency and not current performance, which in many ways is more important. For example, Aberdeen Asian Smaller Companies was always in the list, but has only appeared in it once since July 2013.

I have used my list to put together a SIPP portfolio for my 27-year-old daughter, which is up 30% over 5 years - but the portfolio does need regular monitoring, so it's not just a fit-and-forget situation . . .

One valuable thing the list does show is that concentrating on sectors or geographical areas seems to be a waste of time.

Good luck!

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Suzie B

May 05, 2015 at 19:40

Thank you Maverick; interesting method- I've never been that systematic but I'll give it a try!

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Khayyam

Jul 23, 2015 at 10:18

a trigger, such as becoming unwell, when it is worth moving out of drawdown and into an annuity.

Surely this would depend on how 'unwell' you had become? If you died within a very short time this would be the worst possible advice

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