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Triple jump

A new three-step process could improve pension choices

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Over 800,000 people will turn 65 in the UK in 2012. Most of these people will not have enough money for the retirement they promised themselves.

The erosion of state pensions, significant reductions in employer pension contributions and the lowest savings ratio in almost 30 years mean many people retiring in the future will face far greater financial challenges than any previous generation.

There is no silver bullet for today’s retirees. It is essential that people make the most of what they have accumulated.

One way to help is to encourage everyone to review their options at retirement by making this the default option. This is the most effective way to materially increase the number of people who secure a better pension at retirement.

There are a number of benefits to this approach. It is socially desirable, it would lead to increased consumption, personal tax revenues would increase, as pensions are taxed as earned income) and greater competition among providers resulting in better deals for consumers.

Pension Income Choice Association would like to see whichever party is in power after May 6 adopt its proposals for a new three-step process that all pension schemes would be required to follow:

  • The first step would focus on the choices and decisions people face at retirement and the action they need to take.
  • Step two would require the production of a personalised statement containing sufficient information for people to use to obtain quotations.
  • The third step would be a short communication requiring the employee to inform the company/trustees how the fund should be applied.

We are in the process of testing the new process with consumers and the early evidence suggests that the adoption of this approach would have a material impact on the number of people reviewing their options at retirement.

In addition, Pica would also like any new Government to adopt a number of supporting proposals including:

  • A requirement for employers and trustees to comply with a defined set of minimum standards (coupled with a review of the level of the tax free allowance introduced in November 2004 to encourage employers to provide advice at retirement).
  • Expansion of the FSA comparison tables to include all providers and all annuity types.
  • A review of the trivial commutation limits to help people who would not otherwise be able to take advantage of these changes (because of the size of their funds) commute their benefits for cash.
  • Support the national rollout of money guidance so millions of people can gain access to generic financial advice.

Over the next 10 years, millions of Britons will turn 65. We have the opportunity to act to help improve their finances during retirement at no direct cost to the Govern-ment, no significant burden on industry and requiring no substantial sacrifice from individuals.

Tom McPhail is interim chairman of Pension Income Choice Association

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