The Centre for Policy Studies' (CPS) new 'auto-protection' paper suggests retirees should be automatically enrolled into drawdown at private pension age and then, at 80, residual pots should be automatically annuitised.
The paper, written by Michael Johnson (pictured), said the ‘auto-protection' proposals outlined would help substantially to reduce exposure to financial risks in later life. Two distinct components would make up ‘auto-protection' - ‘auto-drawdown' and ‘auto-annuitisation'.
According to the paper, ‘auto-drawdown' would occur at private pension age - which Johnson said he'd like increased to 60 - in the form of an income drawdown default of between 4% and 6% of pot assets per annum.
‘Auto-annuitisation' of residual pots would then occur at the age of 80. The paper said this would facilitate the collective hedging of individuals' exposure to the unquantifiable risks of longevity and remove later-life exposure to investment markets risks.
The paper also argued that everyone should be free to opt out of one or both phases of auto-protection to pursue alternative retirement options and thus the proposals were about risk management, not the elimination of choice.
The paper concluded: "Auto-protection would ensure savers reaching the age of 55 were not left to wallow in indecision when pondering the complexities of decumulation. Introducing it would bring the policy philosophy behind decumulation closer to that for the accumulation phase."
No 'one size fits all'
Royal London pension investment strategy manager Lorna Blyth was unimpressed with the proposal, however, observing: "We know from our income sustainability heat map that a 4% per annum income withdrawl rate is highly sustainable, with a 95% likelihood achieved, over a 20-year term for those aged 60 to 80.
"However, a 6% per annum withdrawal rate is only moderately sustainable, with 63% likelihood that this will be possible."
Intelligent Pensions head of pathways Andrew Pennie echoed Blyth's view: "Taking income of between 4% and 6% as suggested will not suit everyone's needs," he said.
"Furthermore, in the current low-interest economy, taking this level of withdrawal is likely to erode the pension fund too quickly. It is therefore vital to review withdrawal rates on both a personalised and frequent basis if we are to really tackle the risks of running out of money."
He continued: "There can be no right day to buy an annuity. Some individuals may need to buy an annuity earlier than 80 and others may not need to buy an annuity at all."
Technical Connection head of pensions strategy Claire Trott stressed there was no "one size fits all retirement experience".
She continued: "One proposal I particularly disagree with is increasing the minimum pension age to 60 sooner. We will see an increase to 57 and then it will be tagged to the state pension age, less 10 years.
"It hasn't really been that long since the rise in pension age from 50 to 55 and so increasing it again seems unfair. Those that have saved and can or who want to access their funds should be able to do so - this is really what the pension freedoms were about."
After 21 years as an investment banker, Johnson joined actuarial consultant Towers Watson before taking over responsibility for running David Cameron's Economic Competitiveness Policy Group, working with Oliver Letwin, John Redwood and Next CEO Lord Wolfson.
He is the author of a number of CPS papers, including 2009's Don't let this crisis go to waste, in which he proposed a radically simplified state pension structure and amendments to NEST.
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