The small pension pot problem is not going away anytime soon. Now the industry is calling for government intervention to address the not-so trivial issue. Jenna Towler reports...
With the Budget less than a week away, pensions look set to avoid any major intervention (if you believe the chief secretary to the Treasury Danny Alexander).
He told the National Association of Pension Schemes' Investment Conference that previous changes to pension tax relief were made for a good reason but added "your industry needs stability and I take that very seriously".
But, for once, the pensions industry itself is keen for change, albeit in one specific area. And that area is trivial commutation.
The suitably opaque phrase (in-line with pension industry tradition) means the point at which pension pots are deemed too small to warrant turning into an annuity. At present, the level is £2,000 – any higher than that and you have to buy a (very probably) extremely low-paying annuity for life.
The Association of British Insurers (ABI) is lobbying for that level to be raised to £10,000 in the Budget to give those people with lower-sized pension pots more flexibility on how to access their savings.
Making the change would address a key concern highlighted by the Financial Conduct Authority (FCA) thematic review of the annuity market, which said people with smaller pots had far less choice at the point of retirement.
ABI director-general Otto Thoresen said its latest policy position built on the organisation's Retirement Choices Code, launched in March 2013, which aimed to increase transparency through monthly provider comparison tables and a provider code of conduct.
He said: "If people have small pension pots, the issue isn't just about choice of annuity but whether they should annuitise at all. The industry is urging the government to simplify and relax the rules which state how much money people can take in cash when they come to retire with a small savings pot."
Almary Green managing director Carl Lamb backed the proposed trivial commutation changes. He told PA: "I think it should happen; especially when you factor in today's current annuity rates and what a small fund will purchase you income-wise."
Hargreaves Lansdown head of pensions research Tom McPhail has also been lobbying for the government to increase the limit to between £10,000 and £15,000, and allow pots below that level to be taken as a lump sum. He said a £5,000 pension pot will buy retirees a whopping £5-a-week income.
He added: "It is madness that small investors are being forced to buy poor value annuities. Reforming the small pots rule will help to unlock improvements right across the pension system.
"Small investors will get their money back, insurers will be able to sell better value annuities to large customers, and it will help to minimise auto-enrolment opt-outs".
A £10,000 limit would benefit about 100,000 investors every year, while a £15,000 limit would benefit 150,000 investors, according to McPhail.
Aviva's at-retirement managing director Clive Bolton said £10,000 was a good starting point: "It is essential we now work together to agree a solution that balances flexibility for those with limited savings with the overall goal of getting people to save for a reasonable income in retirement."
ABI in 'retirement advice for all' pledge
Alongside its small pot lobbying, the ABI has also pledged new minimum standards for retirees – stating everyone should have a conversation with their provider or an adviser before making a retirement income decision.
ABI members will make the changes over the next 18 months with a completion target of summer 2015. Pension providers will commit to:
- A conversation for customers with their pension provider or an impartial advice or guidance service about their retirement options. This conversation will include a high-level overview of alternatives to annuities as people approach retirement.
- A comparison of annuity quotes for customers, whereby all providers will offer a comparison, or introduction to an intermediary who will deliver the comparison, early and prominently in their retirement process. The comparison will be offered as an integral part of the process not as an optional extra.
- Ask all customers for information about their health and lifestyle, which they can use to shop around for an enhanced rate.
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