The Organisation for Economic Co-operation and Development has warned that pension reforms championed by former chancellor George Osborne could lead to some people outliving their savings.
According to Pablo Antolin, pensions economist for the Organisation for Economic Co-operation and Development, annuities have been "negatively affected" since the pension freedoms were introduced by the former chancellor.
He proposed a rethink of pension freedoms and savers have a default option that will see part of their pension used to buy an annuity.
In a report produced by the OECD, it is stated that any mandate for the purchase of annuity should be considered with caution, as the need for the protection that annuities can offer is likely to differ significantly across socio-economic groups.
As such, the think tank warned a one-size-fits-all approach may therefore not be appropriate.
The OECD warned a one-size-fits-all approach would likely penalise the lower income groups who would likely not have saved enough to purchase a meaningful level of income.
Speaking to FTAdviser, Mr Antolin explained the negative impact on annuities of pension freedoms.
He said: "Since the freedoms came in the number of annuity contracts signed has fallen. Obviously for the industry it won't be that easy to sell annuity contracts. Providers will have to do something extra to make annuities attractive.
"For us, even before the changes were made, we have always said people like choice.
"It is very important there is a default, which is partial annuitisation - a deferred annuity at 85 should be in place, and the rest a drawdown option.
He added the only instrument that exists in the market that protects against longevity risk is an annuity.
Steven Cameron, pensions director at Aegon, said in the world of pension freedoms, the risk of outliving pension savings is a very real threat to the UK’s future retirees.
He said: "We know that people value security, but this needn’t involve locking money away in an annuity at a time when the rates are offering such poor returns.
“In response to a clear demand from customers for both flexibility and security, there are now flexible drawdown products available which offer the option to select a guaranteed minimum income for life.
"These products provide the flexibility which have made the freedoms so popular while giving individuals comfort that however long they live, they won’t run out of money, and in doing so address the OECD’s concerns.
"We fully agree with the OECD that individuals should seek professional advice to ensure they have enough guaranteed income to cover their essentials however long their retirement lasts.”
ruth.gillbe@ft.com
