Simon Read: We don't want simpler products, just fair finances
The Treasury this week published proposals for financial firms to offer "simple" financial products, so that punters — the likes of you and me — can understand what we're buying and be able to compare the deals offered by different firms.
There's a lot of merit to the idea. If we could make all financial products easier to understand and easy to compare, more of us could become sophisticated shoppers when it comes to savings, loans and investments. Sadly, that's never going to happen. Why? Because the important financial products will always be complicated. They have to be. Take a pension. In its simplest form it is just a long-term savings scheme. So why not make it just that, with your cash put into a savings account?
If all pension schemes were like that, we'd be able to choose the best on the basis of the interest added. But such schemes would fail in their primary purpose: of giving us enough cash to spend when we retire.
Think about it this way. If you want to have an annual income of £20,000 in retirement, how big a pension pot do you think you'd need? Would £100,000 do it? No, that's nowhere near enough. £200,000 then?
Based on current annuity payouts of less than 5 per cent from many providers, depending on your age and health, you'd need a pot of close to half a million pounds. Is that an amount you could ever see yourself saving up? Even in 40 years of working?
That's why a pension scheme is not a simple savings product, it's a complicated investment plan. The kind of returns you could expect in a deposit account are nowhere near enough to generate the kind of growth you'd need to build a decent retirement fund, not least because of the tax advantages of a pension. Number-crunchers at Hymans Robertson reckon a 40 per cent taxpayer would need to put half as much into a pension as in a deposit account to get the same benefit at retirement.
On top of that your cash is invested, or gambled, on shares, funds and bonds. Fund managers use their experience to try to achieve the kind of returns you need to grow your nest egg.
The other key financial product most of us use is a mortgage which, on the face of it, is just a loan, But again there are complications which mean we will never have a simple deal to compare. Not least is the choice of whether or not to fix. And then there are different methods to repay the loan.
So what do the Treasury proposals have to do with these key financial decisions? Nothing. Instead the government focus is on deposit accounts and life assurance.
"These products can be easy to understand," claims Financial Secretary to the Treasury, Mark Hoban. He proposes, for instance, savings accounts that do not offer bonus or introductory interest rates and pay all savers the same rate, regardless of how long they hold the product.
That would be simple. But it would probably not be the best deal for a saver. Which, in short, would mean those opting for simple products would lose out.
Instead of trying to make things simple for folk, the government should do more to make things fairer. Pension exit charges are one thing that needs sorting out while hidden fees on mortgages and credit cards should also be capped. A fairer future, not a simpler one, is what we need.
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