Private sector workers get right to pension income for life

Private sector workers will be given automatic access to a guaranteed pension income for life under plans to be set out by ministers on Tuesday.

In an effort to close the gap between private and public sector pensions, new rules will require providers to offer workers an annual income as standard when they retire.

The change is expected to lead to a growth in so-called collective benefit pensions that target annual increases in pension income to cover the rising cost of living.

It is also designed to help people who take control of their pension pots when they retire but miscalculate how much they need each year to live. Research suggests that some pensioners overspend at the beginning of their retirement, leaving them reliant on the state pension, while others take far less than they could.

Individuals can still opt out of the scheme and take their pension pots to invest elsewhere, but if they do nothing the pots will be put into a new “guided retirement” plan. This will offer them an income guaranteed for the rest of their life that will, in many cases, be protected against inflation, ministers say.

Pensions minister Torsten Bell sitting in the audience.

The government hopes the changes will encourage the creation of large-scale “retirement collective pension schemes”, in which thousands of people pool their resources to maximise their returns.

Such schemes, similar to old-style defined-benefit pensions, use their scale to invest in higher-growth areas, rather than conventional annuities that tend to keep money in low-yield cash and bonds. This should, in theory, create greater returns to deliver a sustainable target benefit level above and beyond payments from annuities.

“nobody thinks the status quo is good enough”

and that the government intended to try to give private sector workers access to pensions with benefits similar to those in the public sector.

“The task is to level up private sector pensions,” he said. “That is the thing that actually needs doing and that is what we’re going to get.”

Bell added that he wanted collective pensions to become

“the norm over the next few years”, arguing that they could provide higher average incomes for private sector workers than the present system of buying annuities.

“That could offer significantly higher average incomes for people,” he said. “It gives them the inflation protection [and] it gives them the longevity protection.”

 While there is nothing new in what Torsten Bell is saying, there is something new in where he’s saying it. It is hugely important that the story that pots can be turned to pensions rings out on the front page of the Thunderer.

Today we can expect to here Torsten Bell’s first statement on turning pots to pension since the launch of CDC a year ago.