According to Disraeli, there are lies, damned lies, and statistics.
I am of the generation that grew up watching Patrick McGoohan in the Prisoner screaming, “I am a name, not a number.” I, therefore, naturally rebel against statistics telling me who I am and what I do.
So half a century after it was first broadcast I find myself screaming, “I am a name, not a number,” whenever another learned paper is published telling me what my spending will be in retirement.
By the time people reach my age they have experienced more than 40 years of adult life.
Over that period they may have married once; married more than four times, even; or never entered into a permanent relationship.
They may have had children, in and out of marriage, or they may have none. Their parents and grandparents may still be alive, or they may have died young.
They may be ‘spendaholics’ or they may be frugal. They may be homeowners or they may be renting. They may be in good health for their age; they may be in poor health and/or in need of care. They may have accumulated much wealth; they may have spent a lot of their working life not in conventional employment.
Those who have been fully employed, could have been lucky and accumulated defined benefit (DB) pensions, others may have accumulated defined contribution (DC) pensions.
The recent Pension Policy Institute briefing note, Dependency on State Pension through Retirement paints pictures of the wide distribution of incomes in retirement. Couple this with its work in November 2014 on the complexity of retirement decisions which contains data on distribution of DC and DB pension benefits. A large number of people do not have the pension wealth that many believe is sufficient to retire with.
Painting a picture
For illustrative points of view, I like to paint hypothetical personas. An assumption I make is that they all receive a state pension of around £8,000 a year. This may not necessarily be true.
The first persona, before their retirement, earned twice the average income at £56,000 a year. If they spent most of their career accumulating a DB pension they may receive a retirement income in excess of £35,000 a year. However, if they had accumulated twice the average DC pot that income would be around £13,000 a year.
The second persona before their retirement received average earnings of £28,000. Assuming they accumulated decent DB pension rights during their working life, they may receive £21,500 a year in retirement. On the other hand, if they have accrued the average DC pot they may receive a retirement income of £10,500 a year. This is not enough to pay income tax.
Could someone on an income of £56,000 a year enjoy their retirement if they received retirement income of £35,000 a year? What if it was only £13,000? Similarly, could someone used to an income of £28,000 a year manage with an income of £21,500 a year or £10,500 a year?
Go back to the variants of the individual we may be talking about. A frugal individual with no dependants who own their own home may be comfortable on the lower income numbers. On the other hand, a renter who has parents and grandparents needing care, supporting a child and grandchild would have no chance of a reasonable retirement and may struggle on the higher income numbers.
This is the danger of retirement income statistics. There are such a wide range of variables that influence spending that averages lose their relevance. From an income point of view, it is important to understand what the individual’s needs are going to be. This means understanding, who they are, what they have, and what their probable spending needs could be.
I have seen commentators and the FCA question the lack of product developments since the introduction of pension freedom.
In my descriptions of the people that need to be served by such product developments, I have mentioned the extremes. There are many in between positions for each of the criteria I describe. Multiply the positions by the criteria and the result is an infinite number of personas the product has to satisfy. The criteria I describe occur across all strata of society.
Pension flexibilities relate to those with DC pensions. Are those on average earnings with average pension pots going to appreciate the lifetime income it will produce? If they are a homeowner will they sooner or later turn to their housing wealth? If they are a renter, will housing benefit and council tax relief influence their decision on how to take their benefits?
What pension freedom illuminates is the need for personal services that help the individual to achieve the best retirement they can with the wealth at their disposal.
This begins with those who provide advice and guidance on retirement income financial planning.
As they develop their services they will be in a position to inform product providers of the components they lack to put together the most suitable solutions for their clients.
It is from that position product innovation can begin to take place. However, developments are more likely to be around retirement income components that can be assembled together to form flexible solutions for consumers rather than off the shelf lifetime income products.
Bob Champion is Chairman of the Later Life Academy