Personal accounts are in need of reform if they are to prevent certain high risk groups of consumers from missing out on a good rate of return, according to research from 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 certain groups including low earners, those 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 may improve the suitability of personal accounts to these groups of people.
Reform A is to increase the trivial commutation limit from its current level of £16,000 to £30,000 and increase the capital disregard from its current level of £6,000 to £10,000.
Reform B is 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 is 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 tricial commutation lump sum and use it to buy a special type of ten-year annuity which would not count in the calculation of entitlement to means-tested benefits.
Speaking at a debate today 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 pensions market development Ian Naismith said: “We would suggest that option A is the most attractive solution but the others are worth considering.”
EOC chief executive Caroline Slocock said: “We would like to see flexibility in contributions to personal accounts because women are often in and out of employment. It is important that the government spends to save in order to make personal accounts work for everyone but particularly women.”
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.”