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Govt urged to default savers into deferred annuities

Influential think-tank the Centre for Policy Studies says the Government should launch a default retirement solution to stop people running down their savings too soon in the wake of the Budget reforms.

Under the proposal, 55-year-olds’ pension pots would be defaulted into an inflation-linked pension, essentially an extension of auto-enrolment, known as “auto-protection”. Report author Michael Johnson says “this could be characterised as auto-annuitisation” but would have to be rebranded because of the tarnished reputation of annuities.

He says: “People would either opt-out or find themselves with a deferred lifetime annuity, which would be a joint-life policy if they are married. That is exactly what goes on in several other countries, places like Singapore and Switzerland.”

Savers who chose to defer taking the proposed default pension should be incentivised by removing income tax entirely on pensions taken more than five years after the private pension age, currently 55. Johnson says this could be paid for with a cut in upfront tax relief.

Johnson argues introducing auto-protection might also encourage occupational schemes to develop risk-sharing post-retirement plans, known as collective defined contribution schemes.

The paper also recommends the creation of a not-for-profit national annuities “auction house”, effectively mandating savers to shop around before buying an annuity.

Johnson says: “All aspiring annuity providers, which could include the state, would be required to participate. Initially only a limited number of standardised single and joint-life, inflation-protected lifetime and deferred annuity contracts would be listed. Pre-auction aggregation of small pots by the house would encourage stronger bids.”

He adds the Government could itself become an annuity provider – “perhaps through NS&I or the Post Office” – which could provide an alternative funding source to issuing gilts.

Johnson says the auction house could also be used to facilitate a secondary market for annuities, an idea recently proposed by pensions minister Steve Webb and tipped to be included in the Coalition’s last Budget before the election.

The paper says the age at which people can access their pensions should be raised from 55 to 60 by 2024 and that the 25 per cent tax-free lump sum option be abolished entirely or at least be made only available to people who defer using their savings.

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. The only default for the application of pension funds should be the OM (which, for reasons unknown, the FCA refuses to mandate ~ does anyone know why? APFA perhaps?) and providers should be prohibited from allowing policyholders to vest their funds unless they produce a certificate to confirm that they’ve sought and received, at the very least, guidance.

    These proposals from the CPS seem to be firmly rooted in the nanny state way of thinking.

  2. Retirees should have the same defaults applied to their pension-wrapped savings as to their ISA-wrapped savings and indeed their bank accounts i.e. nothing happens until the retiree makes a decision.

    On my reckoning the retiree will have passed the legal age of majority at least 37 years previously and so is likely to be an adult. We can bet there will be a small minority % who will either run out of money very quickly or indeed who will foolishly want to take a poor transfer value from DB schemes. And of course, with the FCA so obsessed with its bureaucracy over authorised firms, with little or no focus on perimeter enforcement, we can bet some retirees will fall victim to real scammers.

    Those however will be the minority: the vast bulk of retirees will use their savings with their own best interests at heart.

    I’m genuinely sick of hearing all the silly reasons as to why allowing retirees to have the same access to pensions as their other savings is a bad idea. The only things that are going to go wrong are the comical guidance service, the obvious operational bottleneck from the 2nd line of defence nonsense and of course the willingness of the regulatory system/FOS to pin the liability for any individuals poor decisions on the nearest authorised adviser.

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