Henry Tapper on the decisions made by consumers when it comes to choosing their financial services.
I and my colleagues are fascinated by financial decisions; who to take out your mortgage with, who to bank with, which ISA to choose and which pension scheme to select for your staff.
Which?, Money Saving Expert and the comparison sites are able to list financial products in terms of the interest rates they offer or the stated charges but most of the time, we decide on what we know, what will happen in the first couple of years when the offer is fresh.
So often, what is good today, turns out to be bad tomorrow, the road to financial penury is littered with wrappers marked “special offer” that turned out to be too good to be true.
We need a trusted source
What’s needed is a trusted source, which can provide knowledge not information and can help people choose on a sustainable basis. To some extent, this knowledge is tied up in the brand; for me First Direct is a bank that has delivered magnificent service for over 20 years, at the same time I have banked with Lloyds and RBS who (for me) have been less good. (I remember banking with Citibank at one point, they offered me some free airline tickets to join them, the tickets never turned up nor did the Bank).
My experience, added to the experiences of millions of others makes a brand like First Direct a natural choice for a certain kind of person who likes remote banking. I have never met a First Direct bank manager and hope I never do!
So both in terms of interest rates and charges and in terms of the quality of service, there is a common knowledge bank into which people can pick and could be summed up as brand. Think Fidelity, Legal & General, First Direct and latterly Metro Bank – think brands untainted by scandal that people say good things about. I could print a list of financial institutions that go the other way - but that would be too long for a blog!
On our financial compass
“Pensions are something again. They are the nocturnal beasts of the financial jungle.”
Bank accounts, mortgages and ISAs are quite easy, not only are they relatively simple to understand but they are disposable, people change bank accounts, switch ISAs and re-mortgage and though the experience is not always as easy as we’d like, it is within our financial compass.
Pensions are something again. They are the nocturnal beasts of the financial jungle, talked about but little understood, lurking in our financial portfolios with unrealised potential. The simplification of choice at retirement (started with the easy idea of cashing out) has done something to change this.
People want the choice to pay off a mortgage, cash in an ISA or close a bank account. Until recently, a pension was something that was just there, something you owned about which you had little control. That’s changed…
We have the choices
We now have choices we never expected but they come at a choice.
- an annuity gives security but it comes at the cost of income
- drawdown is good for income but comes at the cost of security
- cash is flexible but may come at the cost of a tax bill.
And to get to the point of having these choices at retirement we need to make choices throughout our life on whether to join or opt-out of the employer’s pension, whether to make extra personal contributions, whether to use the salary sacrifice option and whether to choose funds or rely on the default option.
All of these choice come at a cost and all of the decisions we take remind us of the choices we discarded. The “what would have happened ifs” persist.
Which is why, on the big decisions, it is always worth considering choices and not jumping into things. Because those memories come back to haunt you.
To the future
Over the next three years, over one million decisions will be taken about pensions, not just for the decision maker but for the staff that he or she employs.
Those decisions will have a material impact on the choices nearly five people have at retirement. Some of those one million decisions will be taken with consideration, many won’t. All of those decisions will be remembered by those affected.
The cost of taking the wrong choice may impact the retirement of the person(s) taking the decision.
In extremis, a bad decision could leave staff, employer and even the adviser in such a mess that the only beneficiaries are fraudsters and lawyers.
We are not dealing here with decisions can be easily undone. The numbers of people who switch their pensions is tiny compared to those who change mortgages, ISAs, bank accounts, utility companies. A pension plan is a life sentence.
I find it quite extraordinary that people pay so little attention to the choice of a workplace pension.
By people I mean everyone from the pension regulator to the employee enrolled into one with a lot of intermediaries in between.
The difference in outcomes between a good and a bad workplace pension is huge.