Following writing yesterday’s blog on the problem people have with thinking about their pot as a pension, I spent much of the morning wondering just how we could trigger dormant pots to become pensions without losing the right to do with our money whatever we want.
My conclusion, which I float tentatively now, is that people would probably favour a return to the concept of the normal retirement age , being the point where – unless they specify otherwise, a pot does turn to a pension – automatically.
I say this because I know from schemes that we have worked with at AgeWage, that there is a large amount of money in occupational and personal pensions that is unspent by people beyond state retirement age. A lot of that money is “lost” and forms part of the orphan assets of the defined contribution system, some of that money is being left in non-advised arrangements because it is not needed and is likely to be a bequest and a portion of the money is simply sitting there because people have difficulty taking important financial decisions without the support and guidance they are not getting.
It would be nice if those who have control of these pots, trustees, insurers and SIPP managers, intervened and proactively offered investment pathways and this may in some cases happening. But the problem I am seeing from analysis of scheme data, doesn’t seem to be reducing. Infact there is more “unclaimed” money in people’s DC accounts than ever.
We are about to have a consultation from the DWP – led by Jo Gibson that will be asking questions about retirement income. I wrote yesterday that I hope that Jo and her team are looking at Australia and its “sole purpose” legislation designed to get pots turned to pensions.
I have written that we can learn and improve on the Australian Government’s work in this area. One area where we can improve is in reinstating the concept of the normal retirement age for pots to turn to pensions.
My proposal is simple, the normal retirement age is the state retirement age giving people on average ten years between the minimum retirement age and the point when normal retirement is reached. Well before the normal retirement age is reached, trustees and insurers and SIPP operators contact those with dormant pots and tell them that their pot will turn to some form of pension when they reach this normal retirement age – unless they say otherwise and chose another pathway.
So turning a pot to a pension will become the default at normal retirement age.
How the default is operated would be down to the trustees or insurers or SIPP operators but it would introduce a new responsibility on them in that they would have to choose the means of providing a pension. There are three that I can think of right now.
- The common or garden annuity
- The flex and fix solution put forward by Steve Webb and LCP
- The retail CDC proposal put forward by Simon Eagle of WTW with my (broad) support
You will note that I do not think that a drawdown plan is a pension, I think that any default needs to provide an income for life and so some form of annuitisation. All of the above solutions have that built into the product.
My principal argument for this Government intervention is based on the sole purpose of pensions which I defined for the UK as being
“To provide income in retirement that helps all Brits to live with dignity, by supplementing the State Pension.”
That means getting people to start thinking of DC pensions as – in the first instance – an addition to what they get from the state and for the better off, what they get from the state and their DB plans. For the very well off, DC savings may be inheritable but I suspect that this minority position will seek financial advice to ensure tax is minimised in the bequest.
Of course many people will cash out their pension plans before they get to normal retirement age and some people will choose to manage their pots as they do today, either with an advisor or without.
But the default position that will become the sole purpose of our pension system will be to provide an income for life.
There are many nuances to the default position which we can come to later, we need to think about second death pensions as a result of the pension gender gap, we need to think about inflation protection on the income stream and we need to think about whether pensions need to be guaranteed or flexible.
But before all this, we need to determine what we consider the normal retirement age when the common purpose of pensions is triggered and our pots turn to income.
We incentivise pension saving as pensions are an insurance against old age, tax-relief is currently funding wealth preservation – not the same thing.
Employers are required to comply with auto-enrolment to ensure that staff have security in later life, not an inheritable pot.
We need to get back to basics and I hope that is what the introduction of a sole purpose for pensions and a normal retirement age would do.