The Dangers of Pension Freedoms

Editor's Views: Shunning professional advice in retirement can be a costly business, and are we an algorithm away from the Terminator? 

Holly Black 27 September, 2019 | 10:39AM
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The introduction of pension freedoms in 2015 was a great thing – of course people should have the flexibility and power to choose what they do with their savings at retirement. But it was also an incredibly risky financial experiment.

The Risks of Going Solo

Just because someone can choose what to do with their money, it doesn’t mean they necessarily have the time, inclination or skill to make the right choice. That much was clear from the Financial Conduct Authority’s figures this week, which showed what people have been doing with their pension pots over the past year.

Some 48% of pensions accessed in the period – more than 300,000 – were accessed with no advice being taken. That is deeply troubling.

Some of these pots were very small, granted, but other weren’t. And for every person seeking help from an adviser or guidance website, there was another taking a random punt from a cabbie or just hoping they had enough nous to luck into the right decision.

Many of these people are likely to fall into some of the most common investment traps – underestimating how long we’ll live and overestimating how far our money will stretch.

Indeed, of those entering drawdown (that is, leaving your money invested in the stock market at retirement and taking regular amounts as income) the average rate of drawdown is 8%. You don’t have to be a mathematician to see that this is unsustainable over a potentially 30 or 40-year long retirement.

I’m also incredibly curious about the 355 people with pension pots worth more than £250,000 who withdrew the entire lot as a lump sum – hopefully the hefty tax bill doesn’t come as a surprise when it lands on the doormat.

I don’t think advice should be forced on anyone, and I do acknowledge that there are plenty of people out there who are more than capable of making good investment decisions. But if a pensioner's reason for not seeking advice is simply lack of trust in the industry, that attitude could end up being a very costly one.

Fund Managers Burned by Thomas Cook

One of the difficulties of being a value investor is in avoiding the so-called value traps – that is weeding out which shares are cheap for no reason and are therefore a great investment, and which are cheap for a very good reason and should be avoided. Those fund managers who were left holding Thomas Cook shares as it collapsed this week certainly look to have fallen into such a trap.

Shares in the embattled tour operator had plunged more than 80% over the course of 2018 falling from 124p to 32p, and finally reaching a low of 3p before capitulating. The firm was one of the most-shorted on the FTSE, with almost 10% of its stock out on loan.  

Yet a number of funds held on almost to the bitter end – presumably, either stuck with shares they couldn’t sell or convinced they would come good in the end. For many people, however, the writing had been on the wall for some time: numerous profit warnings, an out-of-date business model, and a competitive industry constantly facing uncontrollable external factors such as the weather, terrorism and Brexit. It shows that even the professionals get it wrong sometimes.

Machine Learning Makes Sense

Computers are getting increasingly smart – that much is obvious from the targeted ads I get based on the websites I’ve looked at, but would you trust a computer to run a fund?

The algorithms being designed and employed by some fund managers are the stuff of sci-fi films – they can read the news and even social media to determine which companies are likely to deliver sustainable earnings over the long term and which are best to be avoided.

This type of thing starts making me speculate about how likely it is that Terminator could actually happen if I think about it too hard. But more than that, I can see the value in it – there is so much information out there, using a machine to read it all and arrive at an unemotional conclusion seems like pure common sense.

But are fund managers in danger of becoming obsolete? So many industries are being disrupted by technology at the moment and one of the first concerns that often comes with this is – what will be the cost to human jobs? As Gideon Smith points out, currently investors still like the idea of a human captain steering the ship, but if computers can prove their skill, I wonder if this will always be the case.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor,


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