Pension reform 'to have ghastly consequences': Fear that retirees will fritter away savings pot... and run out of cash
- From April, over-55s will be able to spend their pension pot as they wish
- This could be a recipe for disaster as some run out of money before death
- Others will fail to realise they may be hit with tax bills when they cash it in
Pension freedoms that come into effect in two months’ time will have ‘ghastly consequences’ as people risk running out of money, a leading think-tank has claimed.
It warns drastic steps must be taken to ensure savers do not fritter away their money too quickly.
From April, over-55s will no longer have to buy an annuity – a guaranteed income for life – with their pension pot and will instead be able to spend it as they wish.
Pension freedoms that come into effect in two months’ time will have ‘ghastly consequences’ as people risk running out of money, a leading think-tank has claimed
But The Centre for Policy Studies claims this could be a recipe for disaster as some run out of money before death, or succumb to fraudsters.
Others will fail to realise they may be hit with huge tax bills when they cash it in, eroding their life savings, it said.
The centre-right think-tank suggested, instead, that people’s pensions should be automatically enrolled into an annuity at the age of 60.
Anyone who wanted to withdraw their pension and spend it would have to specifically opt out.
Michael Johnson, the author of the report, said this ‘safety net’ would make them think more carefully about blowing their pension pot after 55.
The Treasury unveiled its pension reforms last year in response to criticism that annuities had become poor value for money and often provided a measly monthly income.
Some will fail to realise they may be hit with huge tax bills when they cash it in, eroding their life savings
It said savers should have the right to spend their money as they wished rather than lock into a set retirement income for life.
But the think-tank said annuities were ‘an insurance against the risk of outliving our assets’ and should not be so easily dismissed. Mr Johnson said if his proposal – known as ‘auto-protection’ – was not implemented then ‘the risk of running out of money in retirement is very real’.
He suggested all pots should be automatically entered into an annuities ‘auction’, where providers would bid to offer the best rate of income. Pension providers would be forced to do this on behalf of their customers when they reached 60.
Mr Johnson said: ‘For years, we have belly-ached about poor value annuities but providers have not improved their performance.
‘Now is the time to move from nudging to shoving and make companies compete more effectively in an auction.’
He said people would be enrolled into the auction at 60 – or even 65 – rather than 55, because it would secure them a better rate over a shorter period.
Until they reached this age, over-55s would survive on their savings or salary, unless they decided to cash all or part of it in.
The report suggested that the current tax break, where the first 25 per cent of any withdrawals are tax-free, should be axed.
The think-tank said this tax relief needlessly encouraged people to withdraw their money rather than invest it in a lifetime income.
A spokesman for the Treasury said: ‘Our radical reforms are about giving people more choice when they retire.
‘The government believes people who have worked hard and saved all their lives should have the freedom to decide how to use their savings and the guidance to help them make good decisions.’
Last week Pensions Minister Steve Webb warned the over-55s that fraudsters would try to take advantage of the reforms.
Criminals are contacting those with nest eggs and encouraging them to invest a lump sum in anything from dubious wealth funds to overseas homes that do not even exist.
Mr Webb himself said he had been contacted by scammers.
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