Saving into personal accounts could generate poor returns in retirement for vulnerable groups, including many women, according to research commissioned by the Equal Opportunities Commission (EOC) and conducted by the Pensions Policy Institute (PPI).
Middle income earners will receive a better return from saving into personal accounts than under the current pensions system, the report says.
However, some groups, such as women with small pension savings and without full state pensions, could lose out by saving into personal accounts. Their pension savings would reduce entitlements to the means tested benefits they could have claimed had they not saved.
The research identified that being a low earner and having a broken working record could put people at risk of receiving a poor return from saving into personal accounts. Women are more likely than men to have this profile.
The EOC believes increasing the level at which people can take all their pension saving as a lump sum, rather than converting it to annuity income from £15,000 to £30,000, would help people saving in personal accounts get a better rate of return on their savings.
The Commission also recommends increasing the amount people are able to save when they retire without it affecting eligibility for means tested benefits to £10,000. There would also be a further option of introducing a new 10 year annuity product that would not effect entitlement to means tested benefits.
The cost of bringing in these changes is estimated to be £500m a year in 2012, around four percent of the Government's pensions credit spending, rising to around £1bn a year in 2030.
Caroline Slocock, chief executive of the EOC, says: "More people with middle to low incomes need to save for their retirement and personal accounts are in principle a great way to help them. But our research demonstrates that it will not pay to save for many of those who need this help most, such as those women who can only afford to save a little because they are on low incomes or have broken employment records.”
Chris Curry, research director of PPI, says: “The benefits of this particular approach will need to be considered carefully against the costs of reform, and the potential impacts of alternative reforms that could increase the value of saving in personal accounts.” The pensions minister James Purnell also spoke at the EOC summit yesterday. He stressed the importance of making crucial changes to pension rules to ensure it always pays to save.
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