Learn from others to stay true to pension reforms

Steve Groves said: “There are some international examples we need to consider and learn from to ensure that the system pays more than just lip service to its original objectives.”

His comments came at the launch of a 60-page report, How Might the UK Pensions Landscape Evolve to Support more Flexible Retirements, which looked at how Australia, Ireland, New Zealand and the US evolved following changes to their retirement landscape.

The report, from the Pensions Policy Institute, attempted to show how the UK could learn from best practices and mistakes, with a common concern about choice and flexibility across all countries being that of pensioners expending their resources too quckly – or too slowly.

In particular, data from the US highlighted the ramifications of getting the calculation wrong. Some 46 per cent of people in the US die each year with less than US$10,000 in assets, not necessarily because they did not save enough but because 62 per cent had underestimated the length of their retirement.

“The US Treasury has recognised this and the Internal Revenue Service will now allow pension schemes to offer deferred annuities as a default investment to “protect themselves from outliving their savings”, Mr Groves said.

Spending too quickly without managing longevity risk has been a big problem for Australia, the report said, and could be one for the UK.

Australia’s Murray Review last year found that not only had 50 per cent of people taken their money as a lump sum, but most had also used their pots to repay debt or pay off housing costs rather than as an income in retirement.

“Longevity is a challenge and the Murray Review recommended a pre-selected comprehensive income product in retirement – to provide peace of mind that their income will endure through retirement, this includes an element of annuitisation to manage longevity risk,” Mr Groves said.

However, with the UK removing the requirement to buy an annuity – unlike the US and Australia – it could consider changes to the taxation system to encourage saving and discourage unsupportable withdrawals.

The UK could also learn from Ireland, the report suggested, which introduced measures to stop people spending all their pension money after it brought in pension freedom 15 years ago.

An Irish pensioner who wishes to invest in Approved Retirement Funds must meet a minimum income requirement, or invest part of his retirement account in an approved minimum retirement fund from which drawdown is restricted until age 75. This means that individuals cannot run down their defined contributions savings prematurely to the same extent as in the UK after April 2015.

Philip Shier, senior actuary at consultant Aon Hewitt in Ireland, said Ireland’s regulations would “stop a “Lamborghini scenario arising”.

However, there has been no requirement to take financial advice as there is in the UK, and Mr Shier said there was concern that the strategies pensioners used in the approved retirement funds were “sub-optimal”.

“Without sufficient guidance UK individuals will run the same risk under the pension flexibilities,” he added.

The report also highlighted differences between state pensions.

The new state pension has placed the UK at 20 per cent average worker earnings, compared to Australia at 29 per cent, Ireland at 32 per cent, and New Zealand at 40 per cent.

Mr Groves said: “To make the new freedoms work, we need to ensure that we do not lose sight of the original purpose of a pension – to provide a guaranteed income in retirement. We need to learn lessons from other countries and where necessary make adjustments to ensure the UK system is truly fit for purpose.”

Adviser View

Neil Jacobs, financial manager at London-based Phillip Masters Financial Advisers, said: “When it comes to making sure people understand what are the ramifications of pension freedom, it is about striking a balance.

“It is more about common sense, which must prevail, and learning from others’ mistakes so I agree with the PPI – we need to heed other examples to help stay true to the original ideas set out in the reforms.”