This week the government announced it was making pension statements simple. Good news we say, but it doesn’t really get to the root of the problem.
On 2nd May, the Government announced that as part of a drive for simplicity, the Department for Work and Pensions (DWP) has unveiled proposals designed to simplify the retirement information automatic enrolment savers receive each year. Auto-enrolment was part of the new pensions regulations that came into force on 1 October 2012, ensuring every employer with at least one member of staff enrols eligible employees into a workplace pension scheme and contributes towards it.
Simple pension statements
Simpler pension statements have to be a step in the right direction. Anything that can help boost engagement from pensions holders has to be de-facto a good thing. So we applaud the DWP for making the effort.
But I have to say I think it’s only about 10% of the problem, and I’ll tell you for why. This week happened to be looking at the website of Wealthify, one of the new breed of digital wealth managers. I have to say they have done a very creditable job of presenting their service simply and encouraging people to get engaged with their pensions and investments.
Accessing your pension pot
However it’s only when you dig deeper that you remember how complicated it is. I was looking for the drawdown options they offer, drawdown being that thing you do at retirement when you want to access the money in your pension pot. And through no fault of Wealthify at all, the number of words they have to use to describe all the options available just makes you want to sit in a darkened room with damp towels laid across your forehead.
It starts well:
“Drawdown is when you gradually withdraw money from your pension to give you a regular income for your retirement.”
So far so good. But it’s not long before it gets worse:
“You can normally take 25% of your pension out tax-free, and you have the flexibility to choose how much and how often you dip into your pension pot. Each time you draw down from the remaining 75% you’ll pay tax on the full amount. This is known as flexi-access drawdown. Your money purchase annual allowance (MPAA) isn’t triggered when you take the initial 25% tax-free cash, it’s only triggered once you take your first withdrawal.”
And then there’s:
“Alternatively, you can choose to take your tax-free cash out gradually. Each time you take money from your pension, 25% of the amount will be tax-free and you pay tax on the remaining 75%. In this case, your MPAA will be triggered from the first lump sum you take. This is known as UFPLS (uncrystallised funds pension lump sum).”
Darkened room time. Do you know your MPAA from your UFPLS?!? And this is just one small example from a tiny bit of research to see what options are available when you want to start taking money out.
Mind bending complexity
I think Tom Selby, from investment platform AJ Bell a huge provider of self-invested personal pensions, encapsulated this when he said this week:
“While the Government is understandably focusing on the information providers send out to members, it should also acknowledge the role it has played in creating mind-bending complexity in the pensions system. There are countless examples of unwelcome and unnecessarily complicated rules created by the Government.”
Quite.
To spectacularly mangle one of my favourite Yoda-isms: pensions complexity leads to anger. Anger leads to hate. Hate leads to suffering. And it’s true – not getting your pension sorted ultimately will lead to a miserable retirement. I don’t see things (other than statements!) getting any simpler any time soon. So grit your teeth and persevere. And keep those towels on hand.