The chair of the influential work and pensions select committee has called for the creation of a minimum income requirement for people to be able to withdraw all of their retirement fund via pension freedoms, to prevent people claiming state benefits if they run out of money.
Such a move would essentially be a reversal of rules introduced two years ago which gave people total access to their nest eggs to do with as they want.
Frank Field said today (1 November) at a hearing in Westminster that he always supported the drawdown system introduced with pension freedoms on “the proviso that you had to keep enough capital there to prevent you coming onto state benefits”.
“Otherwise you would get into two subsidies – a subsidy tax relief to build up your pension and another call on tax payers to draw benefits again,” he said.
Sir Steve Webb, head of policy at Royal London and former pensions minister, said introducing this minimum floor “would kill pension freedoms”.
If the move was adopted it would see pensions legislation return much closer to pre-2015 rules which restricted drawdown - in which retirees can take out as much of their pension as they want - to the wealthier pensioners.
Everyone else was invariably pushed into buying an annuity, which provided a guaranteed income for life but which in recent years has seen the level of income dwindle due to pressure on rates.
Last month, the Work and Pensions select committee launched an inquiry to investigate whether the pension freedom reforms are working.
With the introduction of pension freedoms in 2015, savers have been seeking to take advantage of the high transfer values of defined benefit (DB) schemes and to move their nest eggs into defined contribution plans, which has pushed MPs to act.
Figures published by Mercer in April showed that as much as £50bn has been pulled from final salary pension schemes in the last two years.
According to figures released by HM Revenue & Customs (HMRC) last week, more than £14bn have been unlocked from defined contribution (DC) pensions since pension freedoms came into effect in 2015.
Sir Steve argued that people aren’t spending their money when they cash out their pension.
He said: “The big issue is not expensive Italian sports cars, its caution.
“Its people that take their tax-free cash, they don’t trust the financial services industry, they put their money into their Isa.”
Sir Steve added that introducing such a rule would be moving back to a pre-pension freedoms world, where there were “pension freedoms for the rich and not for the masses”.
He said: “If you could only access your pension pot providing that you leave enough that you couldn’t possibly draw any means tested benefit at all, including housing benefit – and when we think what rent levels are across the country – you would be talking about a very high income that you would have to secure.”
Sir Steve said that Mr Field’s idea of a cap would “would block people from freedoms that they can currently access, with no intentions of claiming benefits”.
He said: “Let’s say I’m 60, I want to access something to live on until state pension age, I have a DC pot, I want to run it down in five years, then I will get my state pension and occupational pension and live the rest of my life and never claim benefits.
“But in that five-year period, I just want to run down my DC pot. In the world we came from, I couldn’t do that, I had to buy an annuity, but pension freedoms now allows me to flex my income.
“But what you’re saying to me is ‘sorry Steve, you haven’t got this guaranteed income, there’s a risk you might claim benefits, I’m going to force you not to take your pot’”.
maria.espadinha@ft.com
