Actually, the realising often happens at the same moment as the changing. Say your team is winning a crucial football match, but in the last minute the other team equalises. Aaargh. Provided, of course, that you are actually watching the game, the two events are simultaneous.
But sometimes there’s a short delay, and sometimes there’s a really long delay – occasionally even years.
This new pension stuff is a case in point, especially as far as the most appropriate investment strategy during the so-called “accumulation phase” is concerned. (This is extremely important, because while most individuals remain almost entirely unengaged with their pension savings, the “most appropriate” investment strategy is likely to become the default investment strategy, shaping the retirement savings of the huge majority of people who don’t make a personal choice.)
Investment firms and advisers are currently in a complete tizz around what the right default investment strategy should now be. The range of options facing people, from the moment they reach the age of 55 onwards, is so broad that no-one can imagine what a sensible default strategy should look like.
This is in sharp contrast to the position before the budget, where pretty much all default strategies assumed that individuals would retire on their Selected Retirement Date (SRD) and would then immediately buy an annuity with the money in their fund.
You can see that on the basis of what I’ve described here, the change is immediate (well, not quite – it actually comes into effect at the start of the next tax year) and dramatic. Those default strategies based, as most have been, around the idea of a “glidepath” – an investment approach which aims to build value aggressively during the early and middle years of people’s pension saving, and then protect it as the SRD draws near – don’t make any sense when we have no idea a) when people’s actual SRD is going to be, and b) what people will then choose to do with their money.
But the truth is – at last, I’m coming to the point of this blog – that for many of us, none of this is any different from the way things were before. I don’t know what proportion of people actually retire – i.e., stop work altogether – on their SRDs, and then promptly annuitise. It’s different if you work for a big organisation with a clear retirement age and policy – the 65th birthday cake-card-and-carriage-clock ceremony still goes on among many. But for all of us working for ourselves or in SMEs – and many in bigger firms too – it’s never been like that at all.
I dimly remember being asked when I’d like to retire by someone advising me on my pension many, many years ago. At my then-tender age, 65 or even 60 seemed horribly far off. 50 seemed a bit too optimistic. I said 55. This number was as far from robust as you can get As the years went by and 55 approached, I realised that a) it really isn’t very old at all, b) I was still enjoying what I did and c) I needed the money, so all in all I had no intention of “retiring” so young.
In the event, that was just as well, because as I’ve written elsewhere the stock market suffered its biggest-ever fall on my SRD and if I had indeed retired on that date I would have lost 8% of my fund’s value in 24 hours.
But that’s not the point I’m making here. The point I’m making here is to do with the fact that over the years before and after my SRD, it’s become increasingly clear to me that I won’t really “retire” on a particular date at all. There may well come a time when I start working, and earning, gradually less. But unless something terrible happens to my health, there won’t be a day when I stop.
Equally, even before the Chancellor’s announcements, there wouldn’t have been a day when I’d have annuitised my whole pension fund. At some point, I might have annuitised some of it. I might have kept some of it invested, and at some point I might have started to draw down some income from it. And I might have bought a small, old and unfashionable Lamborghini – an Urraco, maybe – with a chunk of the cash.
I should say at this point that since I work for myself and am unlikely to lay myself off or make myself redundant, my post-55 working history is likely to be one of positive choices. For many others, there’ll be just as many twists and turns in the storyline, but many will be of a much less positive kind. When you lose a management job at 55 or older, have you “retired”? For a long time afterwards – maybe even years – you won’t actually know.
How would you have prepared a glidepath for all that? Whatever destination you’d have tried to glide me towards, you’d have found that a) on reflection I probably didn’t want to go there at all, b) if I did I’d want to get there up to 10 years later than I’d said and c) when I finally did get there I’d only want to disembark for a short while before taking a bunch of other flights to a bunch of other destinations.
Now, thanks to the Chancellor, there’ll soon be one new destination on the departures board. Provided I’m willing to take the tax hit, I can take as much of my fund as I want in cash, as soon as I’ve reached the age of 55.
This is, as I’ve said elsewhere, a big and important new destination. If it was a US gateway, it would be JFK rather than CLT, so to speak. (That’s Charlotte, North Carolina, obviously.) But it doesn’t change the fact that for millions of people, including me, the old simplistic “glidepath” approach has been completely inappropriate for years.
What it does seem to have changed is the entirely erroneous assumption in the minds of many that the old simplistic glidepath approach did more or less make sense for millions of people, including me.
And for this belated realisation, I suppose, we ought to be slightly and eventually grateful.