“The spirit of the pension flexibilities which have been widely welcomed by consumers and the pension industry is to give people far greater control over how they use their savings to fund life in retirement. Introducing a new retirement income default isn’t compatible with this new spirit of choice over how and when, people take their retirement income from age 55. People shouldn’t be forced down a ‘default retirement’ route which may not be in their interests.
“Mandating a default retirement income option is almost admitting defeat in the drive for engagement. We strongly believe the true solution is to encourage much earlier engagement with pensions throughout people’s working lives, not just from age 55. This is likely to lead to higher rates of saving and people taking a more active choice over how they want to manage their income when they reach retirement.
“The ultimate default is to leave money where it’s invested until people are ready to make retirement income decisions. But if the government and regulators really believe it’s safer to have a default, it must be reversible. This immediately rules out traditional annuities. Forcing individuals to cash in their pension as a default is highly risky and could have severe tax consequences. The safest solution is income drawdown with built-in guarantees as it’s reversible and adaptable, while offering a level of protection via a guaranteed income or investment return.
“A default is only needed where there is no engagement. Any discussions about a new default must be secondary to encouraging engagement. Now is the time to build on automatic enrolment and move away from inertia to engagement and encourage greater interest in pension savings. The pension industry is moving into a digital age and developing new exciting ways of helping people to visualise what their pension savings could mean in retirement, which could easily last over 25 years. Pensions Wise alone won’t be able to do this, as it’s only accessed at a point in time, from age 55. The pensions industry has an important role to play to push pension planning higher up people’s financial agendas from the day they start pension saving.
Independent Pension Commission
‘‘We do not support an Independent Pension Commission and do not believe it will deter political risk. Politicians will always want to make their mark and it’s important government has the ability to tackle pressing issues. Pensions policy is jointly owned by the DWP and Treasury, with the latter owning tax policy. Removing control of this from the Treasury could have limitations on macro-economic policy and the government’s tax raising ability.’’
Automatic transfer of small pension pots
‘’The best way to deal with small pension pots is to encourage consolidation. We believe strongly that future pension policy must move away from a focus on inertia and defaults and move towards engagement. Otherwise pension savings will stall if people become serial defaulters, with the risk of sleepwalking into poverty in retirement. The ‘pot follows member’ (PFM) for small pension pots, has the potential to increase engagement as employees will have a connection with their current employer’s scheme by making pension contributions, and pot follows member will accelerate growth in the size of their pot. Many would benefit from consolidating before and outside the scope of PFM.’’
More detailed background to the Pensions Institute review commissioned by the Labour Party
Rachel Reeves MP, the Shadow Work and Pensions Secretary asked the Pensions Institute to carry out an independent review of how to boost defined contribution (DC) savers’ retirement income. The terms of references are as follows, ‘The Independent Review of Retirement Income will consider how to support a pensions market that works for all, retaining flexibility and choice how savings are accessed and drawdown, while ensuring all savers, including those on low and modest incomes, are able to secure a decent and reliable retirement income.’
The outcome of the review will be published in the summer, after the UK General Election, and will help to inform the Labour party’s pension policy.
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