20th March 2014
Labour’s Shadow Chancellor Ed Balls has said that scrapping annuities altogether is potentially ‘reckless and irresponsible’. Balls says he supports the principle of more flexibility because the annuities market is not working and people are being ripped off.
However, he also says he wants to study the detail of the reforms.
“Will people with ordinary-sized pension pots be able and encouraged to withdraw all of their pension savings from their pension pot and either try and invest it themselves or spend it?And if they do, what happens when the money runs out? Who then picks up the tab?” he asked.
The Chancellor George Osborne has defended the reform speaking on the BBC’s Today programme. He said: “It’s all part of a coherent pension reform. So we have a more generous basic state pension, less means-testing and that enables us to get rid of a quite old fashioned set of government requirements, put in place many decades ago, that people had to take out annuities.
“While annuities might be right for many people, they are not right for many, and returns from annuities have been much lower over the last 15 years or so.
“In the end, people who have saved through their lives, who have earned that money, I think should be trusted to make their own decisions, with good advice, about what to do with that money in retirement.”
The Institute for Fiscal Studies director Paul Johnson added: “This really is a big change to the pensions market, it will really free up people’s choices but there are risks associated. It will become more expensive to buy an annuity for people who think they are going to live a long time.”
Joanne Segars, Chief Executive, NAPF, said:“The announcement is perplexing. Automatic Enrolment, one of the largest and most successful reforms of workplace pensions ever seen, was introduced to encourage people to make good financial decisions about their retirement, because experience tells us that people are often ill-informed and make poor decisions about financial planning for old age.
“On the one hand the idea that savers can take their pension as a lump sum, albeit subject to tax, may be an incentive to save. However, this choice brings with it a significant burden of responsibility for individuals to understand the choices they are making. We know this is not always the case as people often underestimate how long they will live and overestimate how long their pot will last1. There is a recognised problem with the lack of financial literacy in the UK and there is a distinct lack of detail in today’s announcement on how the Government will ensure people have access to good impartial advice so they make the right decisions about their income for retirement.
“There are many unanswered questions in today’s announcement – not least how a free impartial guidance service will be established within twelve months. Additionally, the effect on defined benefit schemes will need to be tested as the cost and funding implications for these schemes could be significant.
“It is concerning that there appears to be little robust modelling to reassure us the Government has understood the risk that a number of people will run through their pension pots far too quickly. We fear these reforms, without careful scrutiny, will leave a large swathe of people vulnerable to poverty in old age. ”