The real risk in the new pension system (whereby, subject to income tax, you can withdraw or invest your pension money as you like) is not the greed and incompetence of British pensioners, as often suggested by idiots who say they’ll blow it all on a holiday, but the greed and incompetence of the financial industry.
What pensioners need if they are to maintain their investments and get an income from them during retirement is some new and effective products.
Funds that split returns by type – paying the capital gains to savers who aren’t yet retired, and the income to those who are – could work.
Or funds that don’t pay out actual returns every year, but smooth out gains to offer a consistent return that rises with inflation. Or large diversified funds that can pay out capital as income to make returns consistent over several decades.
You might think this isn’t hard. And it shouldn’t be. It just means creating better versions of discredited old products. Think split-capital investment trusts (which paid income to some investors and capital returns to others); with-profits funds (which smoothed returns); and investment-linked or low-priced annuities – all products that have blown up in the past, but that, assuming they are structured with more than just the interests of the provider in mind, would fit the bill nicely.
My worry has been that the industry would see that these products could work – but would miss the bit about how they needed drastic improvements. So it was with a heavy heart that I read the headline in The Sunday Telegraph Money section this week: “Return of with-profits funds”.
Insurance firm Sun Life has come up with a new with-profits fund designed for the new individual savings accounts (Nisas) that has most of the problems of the old fund. It charges horrible fees – 1.5%. It works on a commission basis (60% of your first year’s contributions or 5% of lump sums).
And it has gimmicks – you can invoke a ‘money back’ guarantee if you cash out on the tenth anniversary (not inflation-linked, of course), and you get a £15 M&S voucher when you sign up. Axa Sun Life’s MD Dean Lamble thinks it’s a “very good product for the mass market”.
He’s wrong. Something good for the mass market would be cheap, clear and transparent. Until someone finds a way to do this, look for a good, balanced, gimmick-free managed fund instead (these come under Mixed Investment 40%-85% Shares in the Investment Management Association lists).
There is huge choice here – top performers over the last five years include the JPM Balanced Managed Fund, the MFM Hathaway Fund and the Baillie Gifford Managed Fund.