The report, “How might the UK pensions landscape evolve to support more flexible retirements?” is based on evidence from four countries - Australia, Ireland, New Zealand and the United States - and considers how the UK pensions and retirement income landscape might evolve in the context of the new Budget freedoms.
Factors present in the UK, such as tiered tax rates, mean that it may be advantageous for UK Defined Contribution (DC) savers to convert their savings to a regular income or to withdraw their pensions gradually over the course of their retirement.
The low level of the UK state pension suggests that, relative to other countries, individuals will typically require another source of income in retirement and the absence of healthcare costs in later life in the UK may remove one of the barriers to conversion of pension savings into a regular income during retirement.
The UK policy/regulatory landscape is moving in opposite directions to Australia and the US, with some significant governance gaps emerging.
The report was sponsored by The Investment Association and The People’s Pension.
Commenting on the research, PPI Director Chris Curry said
“While the behaviour of DC savers overseas, where drawdown products have frequently been popular, can provide some insight into the direction of travel of the UK, there are significant differences that may have an impact on its response to pension flexibilities. Differences between the UK and the US, in particular, mean that some of the barriers to annuitisation in the US are absent in the UK.”
“The findings from the research are encouraging in that the UK pensions industry as a whole has an understanding of various types of risk and a sophisticated market has developed here for, in particular, underwritten annuities. The challenge for the industry will be around the identification of effective default glide-paths where it can no longer be assumed that individuals purchase an annuity.
So far, the focus of regulation in the UK has been the introduction of a standards regime to ensure the quality and consistency of guidance. This contrasts with countries, such as Australia, which are now considering the introduction of rules to ensure defaults that manage longevity risk. It is possible that further steps will be considered in the UK that ‘nudge’ individuals towards decisions that ensure they have a regular income stream over the course of their retirement.”
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