When we buy most things, price is an obvious place to start.
If two products appear to do the same job, choosing the cheaper one seems perfectly sensible.
But pensions are slightly different.
The Government and Financial Conduct Authority are currently developing a new Value for Money framework for workplace pensions. One of the ideas behind it is surprisingly simple: judging a pension purely by what it costs doesn’t necessarily tell you whether it is delivering good value.
The proposals are intended to encourage greater consideration of the outcomes savers actually receive, including investment performance and the quality of services provided, rather than focusing predominantly on charges. GOV.UK
And that raises a much broader question.
What does good value actually mean when it comes to your money?
Cost Matters, But It Isn’t the Whole Story
Charges matter because every pound taken in fees is a pound that isn’t invested for your future.
Over many years, seemingly small differences in costs can add up.
But looking at cost in isolation can be misleading.
Imagine two pensions. One costs slightly less than the other, but the more expensive pension offers a different investment strategy, better functionality or services that are more appropriate for the person using it.
Simply looking at the headline charge wouldn’t tell you which represented better value.
The same principle applies much more widely across financial planning.
The cheapest option and the best-value option are not necessarily the same thing.
What Are You Actually Paying For?
This is where the conversation becomes more interesting.
With any financial product or service, it’s worth looking beyond the headline percentage and asking what you are actually receiving in return.
With a pension, that might include the investment options available, how those investments have performed, the quality of administration, the flexibility available when you eventually want to access your money and whether the pension continues to suit your circumstances.
And when financial advice is involved, value becomes broader still.
An adviser isn’t simply there to select an investment.
They might help someone understand whether they’re saving enough, make use of appropriate tax allowances, structure their retirement income, avoid unnecessary tax, plan for their family or simply provide reassurance when markets become uncomfortable.
Some of those things are relatively easy to measure.
Others aren’t.
The Value of Avoiding the Wrong Decision
There’s another part of financial value that rarely appears neatly on a statement.
It’s the decisions you don’t make.
Selling investments during a market fall. Taking too much income from a pension too early. Holding money in an unsuitable place for years. Missing an allowance. Making a decision based on a frightening headline rather than your long-term plan.
Good financial planning isn’t only about trying to make your money grow.
Sometimes its value comes from helping you avoid decisions that could take you further away from what you’re trying to achieve.
Value Is Personal
Perhaps the most important point is that value will not look identical for everyone.
Someone in their thirties building a pension may care predominantly about long-term growth, appropriate investment choices and costs. Investments usually fluctuate in value. Over shorter periods, this means the value of investments can go up and down. Historically, investors who remain invested for longer periods have been more likely to achieve positive returns, although this is not guaranteed.
Someone approaching retirement may place much greater value on understanding how much they can afford to spend and how their different pensions, savings and investments can work together.
Someone later in retirement might be thinking about family, inheritance and how their wealth should eventually be passed on.
The numbers matter in every case.
But so does what those numbers are there to achieve.
Looking Beyond the Price Tag
The Government’s proposed Value for Money framework is specifically concerned with workplace pensions, but the principle behind it is a useful one for all of us.
Price matters.
Performance matters.
Service matters.
And, ultimately, outcomes matter.
When you’re making decisions that could affect your finances for decades, the better question isn’t always:
“What’s the cheapest option?”
It might be:
“What am I getting for what I’m paying, and is it helping me achieve what I actually want?”
That is a much more useful definition of value.
The Government’s current consultation on the Value for Money framework can be found here: Value for Money Framework consultation on GOV.UK