Pensions academic Michael Johnson has urged the government to introduce auto-protection as a default to ensure that savers are able to retire with a sufficient pension, as one of seven policy reforms.
Auto-protection is a default option for people approaching private retirement age, whereby their pension pot would be automatically enrolled in a not-for-profit national auction house for annuities.
Mr Johnson made his argument in a report published today (20 February) by the Centre for Policy Studies, that whilst the pension freedoms were welcome, there are legitimate concerns that some people may fail to purchase suitable retirement income products.
“People approaching retirement need to be encouraged to purchase retirement income products that limit downside risks, notably longevity, investment and inflation risks that almost all of us are incapable of managing by ourselves.
The other six policy reforms include raising the private pension age faster. Today’s private pension age of 55 should rise by a year every two years from 2016, meaning by 2024 the pension age should be 60.
Another proposal is those who defer taking a default pension until at least five years after the private pension age could be rewarded with a pension exempt from income tax, paid for by a reduction in upfront tax relief.
Other suggestions included the state offering default private pensions, perhaps via the Post Office and National Savings and the guidance guarantee acting as an “integral part” of the auto-protection process.
Lastly, access to the 25 per cent tax-free lump sum should be delayed until the age of 60 or 65. Alternatively, it should be scrapped, with accrued rights to it protected.
Mr Johnson called the private pension age an “anachronism that is out of step with post-war improvements in life expectancy”, while pointing out the “inconvenient truth” of offering tax-free status on the first 25 per cent of a pension pot, which he said actively discourages people securing a pension at the age of 55.
“This is daft, when the alternative is a pension 33 per cent larger than otherwise, which would help mitigate the risk of running out of money in retirement. In addition, as an incentive for long-term saving, it is wholly ineffective.”
Alan Higham, retirement director at Fidelity Worldwide Investment, agreed that the national annuities auction is a good idea in principle, but added that some points need further consideration – particularly that it would be wrong to push people towards the so called ‘auto-protection’ as a default at minimum pension age.
He also commented that raising the minimum private pensions age to 60 by 2024 would lead to a sudden change in goal posts for people who saved for years planning on retirement at a certain age.
ruth.gillbe@ft.com
