The Centre for Policy Studies (CPS) has urged the government to introduce auto-protection to ensure people have sufficient pension income to retire.
Michael Johnson, CPS research fellow, said while he welcomed pension reforms as announced in the budget last year, there were "legitimate concerns" that some people might not purchase "suitable retirement income products".
In order to facilitate the purchase of an annuity, Johnson proposed a "decumulation default" system he called auto-protection for those approaching retirement age, under which pension pots would be automatically enrolled in a not-for-profit "national auction house" for annuities. Annuity providers would be required to participate in the auction house, which would make it easier for savers to compare prices when purchasing an annuity.
With the right to opt out, Johnson said auto-protection would complement auto-enrolment, adding: "Savers would be free to opt out to pursue alternatives, consistent with the liberalisations announced in the 2014 budget."
In the report Auto-protection at 55, Johnson proposed other policy reforms such as raising private pension age to 60 by 2024. Johnson said: "Today's private pension age (currently 55, rising to 57 in 2028), is an anachronism that is out of step with post-war improvements in life expectancy. It should be rapidly raised to 60 in 2024, i.e. by a year every two years, commencing in 2016. In addition, politicians should be preparing people for 65 by 2030-35."
Under the current pension system, savers aged 55 or over are allowed to withdraw 25% of their pension tax free. Johnson considered the offer of 25% cash free lump sum of a pension pot as "daft" as it would "actively discourage people securing a pension pot at the age of 55". He advised access to the lump sum to be delayed until the age of 60 or 65 or, ideally, it should be "scrapped".
In addition, CPS urged the government to incentivise people to defer taking their pensions and said those who deferred taking a pension to at least five years after private pension age (currently 55) "should be rewarded with a pension exempt from income tax".
Johnson also criticised the government's pensions guidance service Pension Wise and said it would "disappoint". He said: "It is not intended to deliver what people want, which is advice, i.e. which specific transactions to execute, and with whom." In the report, he proposed a guidance guarantee as an "integral part" of the auto-protection process. He said this should help savers make decisions such as whether to defer for a tax-free pension.
