Pension personal accounts are in need of reform if they are to prevent some high-risk groups from missing out on a good rate of return, says the Pensions Policy Institute.
The research, which was carried out by PPI senior policy analyst Adam Steventon, policy analyst Carlos Sanchez and research director Chris Curry, found that some groups including low-earners, people with broken working histories and those that are single in retirement, could get a lower return from personal accounts than other groups saving in the scheme.
The Equal Opportunities Commission asked the PPI to analyse a series of reforms to the trivial commutation limit which could improve the suitability of personal accounts to these groups of people.
Reform A would be increase the trivial commutation limit from its current level of £16,000 to £30,000 and raise the capital disregard from its current level of £6,000 to £10,000.
Reform B would be to increase the trivial commutation limit to £30,000 and the capital disregard limit to £30,000 in a bid to improve the internal rate of return for certain groups of consumers.
Reform C would be the same as reform A except it would include the introduction of a new drawdown product which would allow individuals to choose to take their trivial commutation lump sum and use it to buy a special type of 10-year annuity which would not be taken into account in the calculation of entitlement to means-tested benefits.
Speaking at a debate this week on the proposed reforms, PPI research director Chris Curry said: “Reform A would extend the scope to take pension saving as a lump sum rather than as an income but it would come at a cost. This reform could cost the Government around £500m a year in 2012, which would grow over time to around £1.4bn in 2050.”
Scottish Widows head of pension market development Ian Naismith said: “We would suggest option A is the most attractive solution but the others are worth considering.”
Pensions minister James Purnell said: “There are no easy solutions in this area and there will always be a trade-off. We will consider the reforms outlined in this research.”