Government policy on personal accounts may have to be "revisited" if the Thoresen review into generic advice fails to identify a short, simple and easy to understand way of providing information on whether to opt-in or out of personal accounts, warns the Pensions Policy Institute.
In its response to the pensions white paper: ‘Personal Accounts: a new way to save’, the PPI says its research into the suitability of personal accounts has identified certain target group where people may be better off opting out of the new system.
But it says although personal accounts are not suitable for everybody, this does not necessarily mean individuals should not be auto-enrolled and personal accounts do have “important implications for what information is needed to help people make informed decisions about whether they should opt out”.
The independent think-tank says while some organisations suggest those on low earnings, or those approaching state pension age should not be auto-enrolled into the new schemes as the low amounts could effect the means-testing calculations, it says the arguments for and against this are ‘finely balanced’.
It points out neither low earnings nor being close to state pension age will automatically mean individuals will receive a low return from personal accounts.
Instead, the PPI argues by not auto-enrolling either of these two groups as a whole, there is a risk that individuals who would benefit from saving in the new system will not join.
The organisation says the government should look at alternative approaches to dealing with the possible low incentives to save for these groups, such as increasing trivial commutation limits, or by making pensions saving ‘invisible’ to means-testing.
But despite these suggestions the PPI warns the Thoresen review will need to consider the specific needs of these groups in designing any generic advice framework, although it admits some of the factors which affect the suitability of personal accounts could be “more problematic than others to incorporate into a system of information and generic advice”.
It says while nobody can predict with certainty all their future life circumstances when making a savings decision, some factors may be relatively straightforward to reflect in a system of generic advice, such as current age, earnings and level of debt.
However other areas such as the affordability of contributions and likely future housing or marital status may be more difficult, which suggests the need for very clear information to help them make informed decisions about whether they should stay in or opt out.
It says any system of generic advice will need to be able to cope with providing advice to a wide range of individuals with different characteristics and financial circumstances, taking into account factors such as whether they have taken, or plan to take, time off work and their possible eligibility for future means-tested benefits.
As a result, the 36-page response says: “It will be essential for the Thoresen review to establish whether or not it is feasible to design information and generic advice that will assist people to make the decision about whether or not to opt-out of personal accounts.”
“If it is not possible to provide information and generic advice in a short, simple and easy to understand way then this suggests that the personal accounts policy needs to be revisited.”
In addition the PPI says even allowing for some caring breaks a relatively low contribution cap – around £3,000 - would enable most individuals in the target group of low to median earners to make sufficient contributions to reach the ‘desirable’ replacement rate of around 67% of earnings put forward by the Pensions Commission.
Although it points out if the annual contribution limit is set at £3,000, median earners aged 40 or older in 2012 and with some caring breaks, would not be able to make sufficient contributions to reach the ‘desirable’ replacement rate if they had no existing pension savings, and as a result they might need a contribution limit of £5,000.
And the PPI points out there may be other circumstances in which individuals would like to contribute larger amounts to a personal account, but may not be able to under an annual limit, including savings built up in another form of savings, or an inherited lump sum or a divorce settlement.
As a result the organisation suggests the government should investigate alternative options to an annual cap, including a lifetime limit approach rather than an annual limit; allowing unused annual allowances to be carried forward into future years; allowing higher contributions from specific sources, such as divorce settlements or inheritances.
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