24th April 2015
Retirees may be ‘nudged’ into turning their pension into an income in future, despite new freedoms, says pension think-tank.
A report by the Pensions Policy Institute (PPI) shows that the UK pension system has ‘unique characteristics’ which will influence how it evolves under pension freedom.
The PPI assessed the pension systems in Australia, Ireland, New Zealand and the US, to consider where the UK may go next. It concluded that tiered income tax rates in the UK meant that those saving into a defined contribution (DC) pension would be better converting ‘their savings to a regular income or to withdraw their pension gradually over the course of their retirement’.
This means resisting the urge to raid your pension and draw it out in one lump sum because it will be subject to higher rates of tax than it would be by drawing it out in smaller sums over a longer timeframe.
The PPI also warned against spending pension savings in one go because of the poor state pension provision.
The report said that ‘relative to other countries, individuals will typically require another source of income in retirement’ but added that free healthcare could encourage people to spend their money, adding that it ‘may remove one of the barriers to conversion of pension savings into a regular income during retirement’.
It noted that the UK was moving in the opposite direction of Australia and the US where annuitisation is being brought in after pension freedom failed.
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.’
He said the UK pensions industry has ‘an understanding of various type sof 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,’ said Curry.
However, he believes in time that the UK will have to ‘nudge’ people towards taking their pension as income, rather than as a lump sum.
‘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,’ said Curry.
‘It is possible that further steps will be considered in the UK that ‘nudge’ individuals towards decisions that ensure thy have a regular income stream over the course of their retirement.’