Pension freedoms and a fast-changing market have left retirement savers with fewer options for planning their finances, says a new study.
The report from think-tank The Pensions Institute looks at the business models of pension providers.
The authors decided two major factors were impacting choice for retirement savers:
- Consolidation among companies reducing the number of firms in the market
- Government action to scrap the need to buy an annuity
“Both have a major impact upon the future health of the retirement income market with consumers set to suffer as a result,” says the report.
State bail outs for big spenders
Pension freedoms, which started in April 2015, removed the need for retirement savers to buy an annuity. An annuity is an insurance product that gives a guaranteed lifetime income.
A combination of low rates of return and fewer sales led many insurance companies to quit the market.
The report warns that as the market contracts, anyone who outlives their pension cash will have to be bailed out by the state.
Report author Padraig Floyd, said: “The industry faces a number of challenges, which are highlighted in this report. There are conflicting policy signals coming, on the one hand, from the encouragement to save for retirement via auto-enrolment and on the other, from the freedom to withdraw funds from age 55, with no obligation to secure a life-long income.
Mixed messages undermine saving culture
“As the report details, in a few years’ time there is the real prospect that there could be no private-sector providers of longevity risk cover. This will result in the state having to bail out those who outlive their pension assets and could severely damage future intergenerational solidarity.”
Floyd cites ‘fragmented’ regulation in the UK as another problem that undermines pension saving.
He points out that giving more control of their money to savers sends one message, while taking away this perceived pension management by tinkering with reliefs and allowances gives another.
The report also concludes that too many people are not covered by automatic enrolment in the workplace and that the scheme could run out of steam if raising contribution levels leads to more people opting out.
