There are two issues that I have with the pension pot strategy. The first is that your pension savings are not safe from life events. The second is that they can sway important decisions in life.
Let me tell you more.
When I started out, I anticipated that I would spend my entire career with one company and retire at the age of 60 on two-thirds of my final salary, payable for life, and mortgage-free. I was a member of a final salary scheme, making additional voluntary contributions to make the dream of my future self come true.
I had taken what I was good at – finance – discarded a bit of what I didn’t enjoy – actuarial work – and chose to join a million others in the UK to pursue a professional career in the financial services industry.
At the age of 40, as head of pensions for a top 5 bank, I had calculated the value of a final salary pension each year as half your age as a percentage of pay. A year of service of final salary pension at 40 adds 20% of pay to your pension. But mergers and acquisitions had left me abandoning 18 years of pensionable service at the insurance company in a final salary defined benefit (DB) pension and now in a money purchase defined contribution (DC) pension scheme with the bank.
Three years later, I was divorced and settled all my assets (house equity and savings) to my ex in order to preserve my pension rights. Ten years later, I was divorced for the second time. I had to give that DB pension to my ex, plus house equity and savings, in order to keep a DC pension.
At the age of 50, there was the second most important day of my life. As Mark Twain said, the most important day is the day you were born; the second is the day you discover why.
That second day was when I discovered that a life of accumulating to meet basic needs would not satisfy soul desires. My soul desire was to use what I was good at, what I loved to do, what the world needed and would pay me for, to make the world a better place for having lived. It is a life of significance and wellbeing in service to others.
But here’s the thing. I now held a quarter of my accumulated life assets in an illiquid DC pension, not accessible until age 55, with no other tangible assets.
That’s when I discovered that there is another way to put in place the financial architecture to support your favourite future.
We each own assets that are out of reach of divorce courts and the tax office. These are intangible assets, such as good character, reputation, our connections and community, our skills, our location, our know-how.
These intangible assets can be identified, entrepreneurial opportunities can be leveraged, and sustainable livelihoods created. We can even create work that doesn’t feel like work from which we never wish to retire.
At age 55, I took that small residual pension pot, handed over half to the taxman, and invested the rest in my business.
I am in my early 60s. Today, there are members in my community happily generating sustainable livelihoods into their late 70s and 80s. So, I am looking to continue this for the remainder of my healthy life, building income and assets so I don’t outlive my capital and passive income streams. I don’t have a pension.
Oh, the irony of it! There’s me, head of pensions for some of the world’s largest institutions, known as Mr Pension to the many financial advisers I have trained. With no pension.
But I have a sustainable livelihood, and a cash flow showing I don’t outlive my capital.
But here’s the thing…
What life choices do we make where we sacrifice life for the sake of a pension pot?
Waking up mid-career to soul desires, then dashing them on the rocks of work existence on the belief that the best pensionable service years are ahead of us. That used to be the case in the job-for-life times of DB schemes. Not now, in an ageist workplace and DC pots that, after inflation, fees, taxes, investment risks, leave us no better off than the money we contributed. In these schemes, you need to pay in £500 per month for 20 years to get a real-terms payout of £500 per month for 20 years.
And how about waking up in a loveless relationship? And putting up with it for fear of losing half of those tangible assets you’ve spent a lifetime accumulating.
Here’s another thing.
At the Academy of Life Planning, we embrace the multifaceted nature of work and life. We understand that while meaningful employment can enrich your life, flexibility remains key. It’s about striking a balance—finding harmony between work that fuels your passion and having the agility to adapt to life’s ebbs and flows.
Our ethos is deeply rooted in the concept of Ikigai—a Japanese philosophy that seeks to merge one’s passions, talents, societal contributions, and economic sustainability. Our encouragement is not to wait until the twilight of your career to seek this synthesis but to actively pursue it much earlier. This forward-thinking mindset ensures that when pivotal moments arise, you’re already immersed in endeavours that invigorate and fulfil you, rather than hastily seeking them out in the rush of later life.
Perhaps your Ikigai manifests as a vibrant side project or blossoms into a full-time venture that liberates you from the daily grind. Mark Zuckerberg once asserted, ‘The biggest risk is not taking any risk. In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.’ We embody this sentiment, championing the pursuit of a life that resonates with your core values and dreams, challenging the traditional trajectory of retirement planning.
We at the Academy are devoted to supporting you in this explorative journey. With our array of tools, seasoned wisdom, and tailored coaching, we aim to design a life and financial blueprint that’s as fluid and resilient as life demands, equipping you to navigate your path with confidence and anticipation.
Your active participation in this conversation is highly valued. I commend your willingness to consider an alternative approach to asset strategy, one that diverges from the conventional ‘maximise your pension pot’ mantra championed by pension firms. Engagements such as these are vital to our community, fostering collective development and the enrichment of our collective knowledge.
‘The most dangerous risk of all – the risk of spending your life not doing what you want on the bet you can buy yourself the freedom to do it later.’ This profound statement mirrors our guiding principles at the Academy. It’s a powerful reminder of the urgency to pursue one’s passions and desires promptly, embodying the Academy’s vision of wholeheartedly embracing life’s journey and not deferring personal fulfilment for the illusion of future financial freedom. It underscores the importance of living a life of authenticity and purpose, today and every day.
Questions & Answers
Q: What exactly is the ‘pension pot strategy’, and why might it be considered risky?
A: The ‘pension pot strategy’ typically refers to the conventional approach of saving money into a pension scheme throughout one’s working life, with the intention of relying on it for financial security in retirement. The risk lies in the fact that life’s unforeseen events can disrupt this strategy, and it also may lead individuals to make life choices based on preserving their pension, potentially at the expense of their happiness and fulfilment.
Q: How did personal experiences shape your view on traditional pensions?
A: My personal journey through two divorces and the shifting landscape of the financial industry taught me that pension savings are vulnerable to life’s unpredictability. It led me to the realisation that there’s more to life than just financial accumulation, and that intangible assets like character and skills can be the foundation for a sustainable livelihood.
Q: Can you explain what Ikigai is and how it relates to financial planning?
A: Ikigai is a Japanese concept that translates to ‘a reason for being.’ It’s the intersection of what you love, what you’re good at, what the world needs, and what you can be paid for. At the Academy, we integrate Ikigai into financial planning by encouraging individuals to align their livelihood with their passion and skills, ensuring both personal satisfaction and financial sustainability.
Q: Is it truly feasible to find work that doesn’t feel like work?
A: Absolutely. By identifying and leveraging our intangible assets, we can create or find work that aligns with our passions and skills. This kind of work brings joy and a sense of purpose, making it something we’re content to engage in indefinitely.
Q: How can the Academy of Life Planning help me if I’m already mid-career and haven’t started planning for this ‘favourite future’?
A: No matter where you are in your career, the Academy can provide guidance to help you pivot towards a future that’s more in tune with your aspirations. We offer tools, resources, and coaching to help you map out a flexible life and financial plan, tailored to your unique circumstances and goals.
Q: What does it mean to take risks in the context of life and financial planning?
A: Taking risks in this context means stepping out of the comfort zone of traditional retirement planning and embracing a more dynamic approach that considers your personal values, aspirations, and changing life circumstances. It’s about making strategic choices that may not conform to the norm but lead to a more fulfilling life journey.
Q: How important is it to have a backup plan, and what should that look like?
A: Having a backup plan is crucial. It should be flexible and adaptable, allowing for changes in your life’s direction without compromising your financial security. This may include developing multiple streams of income, continuous learning, and staying open to new opportunities.
Q: How can I start discovering my Ikigai?
A: Begin by reflecting on activities that you enjoy and that you’re naturally good at. Consider how these can address a need in the world and potentially provide a source of income. The Academy can assist with tools and coaching to help you explore these avenues and integrate them into a cohesive plan for your life and work.
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