Adam Tavener looks at the recent publication of the Department for Work & Pensions (DWP) select committee pension freedom and choice inquiry, and concludes that its close, but no cigar quite yet…
Last week, the DWP select committee released their findings on the pension freedom and choice inquiry – focusing on what was working well, what wasn’t, and what more needed to be done.
The overall tone was fair and balanced. The much-hyped mass purchasing of Lamborghinis never happened and although there have been many full encashments of pension pots, the overwhelming majority are less than £30,000, and often they are a small part of a person’s wider pension savings. So, no need to panic just yet, Mr Mainwaring.
There are also areas of concern, however, and overwhelmingly these centre around consumer engagement, awareness, decision-making and willingness to take advice (or their ability to afford advice). All drums I have been beating for years.
Several suggested initiatives are recommended - the most engaging, yet practically challenging, is the creation of a pensions dashboard which would allow an individual to view all their current and previous pension arrangements in one place to establish what these might be worth as an income in retirement.
This tool would certainly increase engagement, and would also function as a long-range early-warning system for individuals who have not yet been willing (or able) to save at a proportionate rate to their retirement aspirations. The challenges are not small, however. Here at Clifton we took several years and invested heavily in such a tool for our clients. It was a substantial tech build which delivers an elegant real-time valuation and projection resource for SIPP and SSAS clients.
However, expanding its capabilities to include a real-time valuation and retirement date projection for every single pension scheme that every person in the UK has been a member of is mind-boggling. So, although the government has deeper pockets than us, the DWP may benefit from a chat with industry players such as ourselves before embarking on this project.
Mid-life pensions MOT
Another core recommendation was a ‘mid-life pensions MOT’. Basically, a sense-check to see how close, or far away, a person is from their (presumably stated) retirement income goals. But many questions remain unanswered - who would deliver this, how it would be delivered, and crucially, how do you get people to engage with it? Quality IFAs are already swamped and would be unlikely to provide a cost-effective intervention given that large numbers of individuals have relatively small pension pots.
Robo advice may well hold the answer to the problem, or at least part of it. There are a whole host of digital tools and diagnostic algorithm-driven sites springing up. Incorporating such functionality within the proposed pensions dashboard and making it available at any time, and at minimal cost, seems to me more sensible than a one-off ‘MOT’.
Small business failure
One area that the committee completely failed to tackle, however, was recommendations to support small business owners. We submitted a substantial piece of evidence to the select committee raising some important points as this group has a completely different relationship with pension savings to all other groups.
Most business owners place the value and prosperity of their enterprise as a far higher priority than saving for retirement into a pension. It’s staggering that between 2007 and 2016 the number of self-employed saving for retirement halved. That’s huge. A lack of confidence, engagement and a perception of rigidity are all part of this problem, and this, more than any other area, is one that the accountancy profession can help to improve since virtually all SMEs will interact with an accountant.
The perceived rigidity of pension savings for SME owners needs challenging. Since the popularisation of pension-led funding as a business finance tool, there has been no reason for a business owner to feel reluctant to commit liquidity to pension savings. Far from it, yet the myth of lack of access persists.
Equally, the number of SMEs choosing to access their pensions after the age of 55 under the ‘freedoms’ regime to finance business growth, and taking the consequent tax hit, is just depressing. I was recently interviewed about this on Radio 4’s You and Yours programme to answer why SME owners are walking into big tax bills under the freedoms regime when they didn’t have to. A simple lack of awareness as to their alternatives was the answer.
On air, I received some very welcome support from Michelle Cracknell, chief exec of The Pensions Advisory Service (TPAS), the government’s body for those seeking guidance on all matters pension. Michelle was unequivocal in her belief that SMEs need to understand that the types of pension they can own allow a very high degree of flexibility, and the need for a taxable encashment should be very rare. Well said Michelle, but so much has yet to be done before this is properly understood by the majority of SMEs.
Despite our detailed evidence on this area, the committee really did drop the ball on this one. After all, there are over five million small businesses in the UK; surely, they deserve their unique challenges and possible solutions considered, rather than being lumped in with all employed pension savers. So, for me DWP, you did some good stuff but missed out a vital part. No cigar.
About Adam Tavener
Adam is founder and chairman of Clifton Asset Management Plc, the innovators behind the Pension-led funding brand (www.pensionledfunding.com), providing high quality non-bank finance to SME's across the UK. Clifton employs approximately one hundred staff in their headquarters near Bristol.
Currently almost 2,000 businesses have used Clifton for pension-led funding. With over £260million of pension-led funding provided to these SMEs, Clifton is now one of the largest alternative funding providers in the UK, and it was recognised at the Business Moneyfacts Awards 2014 as the Best Alternative Funding Provider in the UK.
The Clifton Group of companies also includes Pensioneer Trustee’s Morgan Lloyd (www.morgan-lloyd.co.uk) and Wealth Management and Employee Benefits business, Clifton Wealth Ltd (www.clifton-wealth.com).
Adam and Clifton were the catalyst for the creation of the Alternative Business Funding (ABF) collaboration and non-bank funding portal - www.alternativebusinessfunding.co.uk. The portal unites the country's top non-bank funding providers to exchange rejected applicants for credit between themselves. In 2014, ABF successfully lobbied BIS and The Treasury to introduce legislation to force the major banks to pass over the details of rejected SME applicants to the non-bank sector.
In the course of developing the ABF collaboration Adam was part of The Treasury working group created to deliver the new bank referral legislation. As well as HMT, Adam has advised the British Business Bank, Downing Street and The Department for Business, Innovation and Skills.
In 2017, HM Treasury, acting on the advice of the British Business Bank, appointed ABF as one of the Government’s designated finance platforms for the Bank Referral Scheme.
Adam is a CBI regional council member.