Default Reform: Preventing low incomes with an automatic income plan

This discussion paper considers how policymakers can prevent low incomes among DC retirees following the April 2015 ‘pension freedoms’ in light of international evidence from countries with ‘voluntary annuitisation’ frameworks and research on the financial capability of DC savers in the UK.

The paper argues:

  • There is a high risk that that over time, the April 2015 changes to rules on DC pension saving will result in lower average retirement incomes for DC pension savers in the UK as other countries have experienced, notably Australia;
  • The government’s ‘guidance guarantee’ is unlikely to be successful in preventing lower incomes or poor decisions.
  • More widely, there is a significant risk that the April 2015 changes to DC pension taxation will result in an increase in pensioner poverty.

Against this context, the report says policymakers have three choices:

  • Do nothing;
  • Re-impose restrictions on the use of DC pension savings;
  • Implement a new default ‘automatic income plan’ for DC savers at retirement, while leaving the April 2015 ‘freedoms’ in place.

The report argues the government should:

  • Define, implement in regulation and promote a default ‘automatic income plan’ for DC retirees in the UK, while retaining the right for individuals to withdraw their savings from the age of 55 subject to their marginal income tax rate;
  • The default automatic income plan should provide a predictable, secure (guaranteed) and good-value income for DC retirees.

The report goes on to explore a range of related policy questions for a new, default option for DC retirees including:

  • Defining ‘good’ in the context of an automatic income plan;
  • Options for policymakers in delivering an automatic income plan, and how to ensure good value-for-money in the absence of consumer-level competition;
  • Design choices for a default automatic income plan, relating to income drawdown, longevity insurance, use of individual data, small pots and ‘hard defaults’.

The report concludes that given the implementation of a default automatic income plan for DC retirees poses negligible downsides for policymakers, it is unclear why government would choose not to implement such an approach which, through ‘liberal paternalism’, allows policymakers to resolve apparently contradictory consumer preferences for flexibility and certainty.

You can download a copy of the research here: Default Reform: Preventing low incomes with an automatic income plan.

Author: James Lloyd (Strategic Society Centre)

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