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.