Don't speculate when you decumulate
There is a new word going round insurance circles. Decumulate. It’s not in the dictionaries yet, but it soon will be. There are trillions of pounds riding on it.
Decumulation is what you do with your capital in retirement. While you are at work you accumulate. Buy a house. Save in an ISA. Put money into a pension. But once you retire you want to decumulate. Having spent a lifetime turning your hard earned income into capital retirement is the time to turn that capital into an income. Or as the bumper sticker says ‘Off SKI-ing’ - Spending the Kids’ Inheritance.
Over the last few months this concept has moved from bumper stickers to serious financial seminars. I have heard the word ‘decumulate’ ‘decumulation’ and decumulating’ at pensions industry conferences, meetings of insurance people, academic discussions of debt, and even from the mouths of charity policy makers. And of course like any fashion it has been taken up by politicians. Decumulation is about to become big business.
And not before time. The financial services industry has taken far too long to realise that retired people hold most of the wealth in the country, locked up in their homes which may now be worth ten times what they paid for them, their pension plans, many of which are in six-figures, their investments and their savings accounts. It is literally trillions of pounds. Naturally the banks and insurance companies want, as they would put it, to offer the baby-boomer generation the innovative financial services it needs. In other words get their hands on some of it.
This may not be a bad thing. Innovation is sadly lacking in annuities – the income for life insurers give you in exchange for your pension pot. In equity release – the capital sum they give you in exchange for some or all of the value of your home. And in savings and investments which seldom give you an income and protect you from inflation.
But the problem with innovative financial products is that when they are new no-one can really be sure how well they will work and how bad the inevitable downside will be. Look at mortgage endowments, split capital investment trusts, and even the early days of personal pensions. So great care is needed.
In the BBC’s Dragon’s Den business hopefuls pitch their ideas to five self-made multi-millionaire dragons and ask them to invest. One dragon, Theo Paphitis (who owns Ryman and La Senza) often asks “Why should I spend £100,000 of my children’s inheritance on your idea?”
It is the perfect question to ask the sales person trying to flog you – on commission as likely as not – a new and innovative decumulation product. Even if you – and probably they – know you really refer to ‘my hard-earned wealth I intend to spend on holidays and travel for as long as it, and I, both last.’
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