Work hard…earn…save…invest…retire….go on a cruise. The concept sounds easy enough, but the investing part can be daunting. Even many financial experts find it too complex and confusing. One of the world’s top bankers has just admitted that he’s left befuddled by retirement planning. If even the professionals can’t work it out, should we all just give up?
A recent Bank of England survey of the general public asked them to complete this sentence: “I believe that financial markets are likely to become more [blank] over time.”
The top response, perhaps unsurprisingly, was “corrupt”. Other top responses included “volatile” and “manipulated”. It seems the British public is on to something.
At the same time the bank polled its usual business contacts – people working in the elite circles of the financial industry and academia. Unsurprisingly their top responses were different. The favourite blank that they fired was “regulated”, followed by “important” and “accountable”.
This information was contained in a speech given on Monday about the lack of trust that the public has in financial institutions. The speech was given by a man called Andy Haldane, aged 48. You almost certainly haven’t heard of him, but in fact he’s one of the world’s most important bankers.
Haldane is one of the top dogs at the Bank of England. To give him his full, non-canine title he’s the “Chief Economist and Executive Director of Monetary Analysis and Statistics”. With a title like that it’s a fair bet that his skills stretch a bit further than just basic sums.
Haldane was once tipped to be the next Governor of the Bank of England – equivalent to the Chairman of the Federal Reserve – although ultimately that job went to Mark Carney, a Canadian. In 2014, Time Magazine included Haldane in its list of the world’s 100 most influential people.
In other words he’s one of the world’s top operators inside one of the world’s most important central banks (which is also a bank regulator in the UK). As such, it’s a certainty that he’s had an excellent financial training, and knows the banking sector as well as anyone alive. There are few people likely to be more familiar with the mumbo jumbo and mathematics of the world of money.
The overall theme of Haldane’s speech was the lack of trust in financial services – and the gulf of perception between industry insiders and outsiders. Warming to his topic, Haldane said the following, beginning with traditional British modesty:
“I consider myself moderately financially literate. Yet I confess to not being able to make the remotest sense of pensions. Conversations with countless experts and independent financial advisors have confirmed for me only one thing – that they have no clue either. This is a desperately poor basis for sound financial planning.”
That’s a big admission for a top banker to make, especially one with a very public reputation to protect. In fact, it’s refreshingly honest.
Haldane has concluded that other financial experts don’t understand one of the most important areas of their industry.
But it’s also pretty alarming, coming from the lips of one of the most financially literate people on the planet. Haldane has concluded that other financial experts don’t understand one of the most important areas of their industry.
He’s admitted that supposed “experts” are at a loss when it comes to pensions and investing for retirement – or more specifically the pension system. Of course he was talking about the British system, but I suspect that things are just as complex in most developed countries.
In the UK – just like the USA and most other developed countries – the government pays out a modest state pension to retirees. But anyone who wants to retire in comfort needs private savings and investments as well, often in the form or a private pension or retirement plan.
If you don’t make private provision then you’re putting full trust in whatever future governments you may have during your later years. Since when was that ever a good idea? It’s even worse when you remember that your government already has huge debts, and that each year a bigger and bigger percentage of the population is in retirement.
Pensions and retirement plans are simply legal structures that offer tax breaks to investors, which means the profits pile up faster. In theory they’re supposed to encourage private saving for retirement. The downside is reduced flexibility of when you can spend the funds.
The problem is the pension rules are far too complex, which puts people off. How much you can invest each year…how big the tax breaks are…how big the fund can become before it’s taxable…what you can or can’t invest in…how and when you can take the money out in future…who gets the money when you pass on from this world…and so on.
Most people find all the detail too dull and confusing, and who can blame them? The problem is that this means most people are spurred into inaction, and end up saving far too little, or start far too late.
The days of comfortable pensions paid by past employers are mostly gone. This leaves many in for a rude shock when retirement eventually comes around, as it surely will.
The days of comfortable pensions paid by past employers are mostly gone. This leaves many in for a rude shock when retirement eventually comes around, as it surely will. They simply won’t have enough put away to live as comfortably as they expect. At least, not for long.
Of course this complexity is self serving, both for the governments that set out the rules and the financial industry that lobbies for them. It’s designed to be difficult. And it’s not just the realm of pension rules where we find this. The same can be said for excessively complex tax legislation, regulation, and ridiculously over complicated investment products.
Tax lawyers, accountants, government inspectors, regulators, civil servants, fund managers, financial advisors, insurance companies…all of them have their snouts buried deeply in the trough of complexity. It keeps them all busy and well paid.
It also preserves the financial services cartel, making it hard for new challengers to offer a fresh approach. If all the rules and regulations are massively complex then the barriers to entry are hugely expensive to pass through.
Vast amounts of capital, and many years of cash burn, are the price of entry. Ultimately, it’s the customers that suffer from the reduced competition brought about by complexity.
Haldane’s admission of his own confusion with retirement plans draws attention to this morass, even if it wasn’t his intention. But where does that leave you? Should you give up?
Of course the answer is no. You just have to accept that things have been made much harder than they could be.
Then you have to dig into your deepest well of patience, do your best to play the cards that you’ve been dealt, and get on with it. You should invest as much as you can afford, and make sure you start as early as possible.
Giving up is not an option. The alternative is an impoverished old age. I don’t know about you, but I don’t plan to rely on any government to keep me in comfort in my dotage.
Sadly, OfWealth can’t do anything to simplify government rules and regulations, wherever you live. But we do try to explain the investment world in as simple a way as possible. And, of course, to highlight some of the best and worst places to invest.
I always like to hear from you, our readers. If you find something I write particularly helpful…or think it hasn’t explained something clearly enough…or just plain disagree, then let me know at the email address below. All messages will be read, even if I can’t promise an answer every time.
In the meantime, don’t give up on investing for your future. Set up a retirement account if you don’t already have one. Check how your plan is going if you do. See if there are some livings costs you can cut out (unnecessary and expensive insurance cover is usually a good place to start). Save and invest as much as you can afford every month.
It may not be easy, but it’s well worth it in the long run.
Stay tuned OfWealthers,