The United States is making further moves to boost take-up of annuities by allowing parts of funds to default into lifetime income products.
Most US savers put money into a 401K defined contribution scheme, which can be withdrawn from age 59 and a half. Any withdrawals before this age are subject to massive tax penalties.
On Friday, the US Treasury said it will allow retirement funds to offer long-term deferred annuities as a default investment in 401K retirement accounts.
It means US workplace pension funds can automatically use savings to buy an annuity product available upon retirement.
In July, the US Treasury offered savers who buy annuities extra tax relief in a bid to boost take-up. The US Treasury says it wants to stop savers running out of cash and outliving their savings.
New research from Hargreaves Lansdown today shows 12 per cent of UK savers are expected to blow their pension pots next April when new freedoms kick in.
Experts have accused Chancellor George Osborne of discouraging the use of annuities when he abolished the so-called “death tax” on pension funds last month. Pensions minister Steve Webb has even suggested existing annuity contracts could be unwound.
US Treasury deputy assistant secretary for retirement and health policy J. Mark Iwry says: “As boomers approach retirement and life expectancies increase, income annuities can be an important planning tool for a secure retirement. Treasury is working to expand the availability of retirement income options for working families.
”By encouraging the use of income annuities, today’s guidance can help retirees protect themselves from outliving their savings.”
Cass Business School Professor David Blake, who is leading Labour’s taskforce into pensions, says: “The Chancellor and his friends are sufficiently rich that they will never need to buy an annuity and hence do not understand why anyone else would want to either.”
Partnership head of corporate affairs Jim Boyd says: ”One of the most significant risks facing all advanced economies is that ageing populations are not only growing rapidly but are living longer.
”Annuities, which guarantee an income for life offer one of the few ways of managing longevity risk and people outliving their savings and falling back on the state. The UK annuity market has been viewed with envy by many advanced countries – so it is hardly surprising that the US is moving in this direction.”