Adam Tavener outlines how the UK’s lost pension assets could be used to benefit both the individuals holding the schemes and the UK economy in general – and the role the accounting profession has to play.
In a recent Tav on Money filming session, I covered some statistics released by the Association of British Insurers (ABI) which suggested that some 1.6m UK residents have, between them, ‘lost’ £20bn of pension assets at an average of £13,000 each. By lost, I mean that these monies sit in schemes where the provider and owner no longer have contact and are essentially orphaned. This underlines the urgency of getting the long-awaited pensions dashboard up and running.
Some days later I was reading a guide by Morgan Lloyd: a firm that acts as a SIPP and SSAS provider. This document details the various ways pensions can interact with property - both commercial and residential - and is a real eye-opener. As someone who has been in and around the pensions industry for my whole career, I must admit that there was a lot of stuff in there that even I didn’t know was possible.
This got me thinking. Averages being what they are, the £13,000 figure I quoted in the first paragraph is somewhat meaningless. The chances are that a good proportion of the ‘lost’ pots are pretty trivial in size – possibly about half of the total. That suggests that there are possibly around 800,000 individuals in this country with inactive pensions whose value may well be approaching or exceeding £30,000, an amount that begins to feel useful when considering a long-term wealth accumulation strategy. Of these, another subset, say 20%, will have over £50,000 in the ‘lost’ pot.
If we were to assume, once again without any scientific basis, that their average age is around 50 that would indicate that were they to be reunited with their errant pension savings they would have some 15 years to do something useful with it before the average retirement age of 65, although clearly that number keeps rising.
Back to the guide to property investments and pensions. Fifty thousand pounds in a pension puts a person within range of a proper, albeit fairly modest investment in commercial property or a land purchase, or the acquisition of an asset for residential development.
Since pensions can borrow, the rules would allow for a purchase price in the order of £75,000. Let’s say this hitherto lost fund was used to acquire a commercial premises for that amount, £75,000, yielding a 4% rent and an annual capital value increase of 2%. Other costs notwithstanding this would indicate a value in 15 years’ time of £179,000 in very round figures.
Subtracting the initial capital borrowed and an assumed 2% interest rate over the term leaves us with a net fund value of around £147,000. Given that this was formerly, in my scenario, ‘lost’ money, that’s not a bad little windfall. At this point, our theoretical client can take £36,750 completely tax-free leaving a balance of £110,000 to either provide income or to take in phased withdrawals.
So, in my fantasy world, by acting now and doing something sensible with unloved and overlooked pension pots would suggest that in 15 years’ time 160,000 UK residents would be in receipt of tax-free cash in the order of £36,000 each, collectively around £5.8bn hitting the shopping economy all at once, plus a further £17.6bn in income-producing funds. That’s a lot of potential prosperity currently being lost down the back of the sofa.
Clearly, I am oversimplifying, making unscientific assumptions and, beyond the original ABI figures, could not defend any of this in a court of law. Equally, I could also counter-argue that much of this ‘lost’ pension money will continue to achieve some fund growth where it is now, albeit at a pretty unpredictable rate. Nonetheless, my point stands. If it were any other sort of asset most people wouldn’t dream of losing touch with £13,000 worth of their own cash. Stick the word pension in front of it and suddenly it becomes invisible. Crazy.
Helping people take ownership of, and responsibility for their long-term savings assets is an area where the accounting profession has a real role to play. Educating them as to what their strategic options might be to grow these assets is also hugely important and we need to get these messages out there and much more widely understood.
About Adam Tavener
Adam is founder and chairman of Clifton Asset Management Plc, the innovators behind the designated business funding comparison platform Alternative Business Funding, providing high quality finance to SMEs across the UK. Adam hosts ‘Tav on Money’ a regular series of video opinions on YouTube.’