The drastic changes to the pensions system announced by Chancellor George Osborne in his Budget do not alter people’s retirement needs, but do offer greater choice, according to John Ball, UK head of pensions at Towers Watson.
Ball predicted that some of those who chose to opt out of annuities would enjoy better outcomes due to their new found freedom, but that others would rapidly deplete their savings or prove overly cautious.
He added that defined contribution (DC) pensions would not always remain as pensions, and that people accessing their pension pots earlier would mean paying tax earlier (the Government has predicted an increase in the tax take of £1.2bn in 2018/2019 because of the change), with less tax being collected later.
However, there may be a public/private sector (or defined contribution/benefit) divide.
The Government has indicated that it intends to block transfers from defined benefit (DB) pensions in the public sector to DC schemes, because it would prefer to pay a small sum each year rather than a substantial one-off sum upon retirement.
Ball said that the Coalition was also considering a Berlin Wall in the private sector between DC and DB schemes, to avoid undermining the demand for gilts.
Ball forecast investment reviews aplenty for DC schemes, and said that if people were no longer expected to buy annuities schemes might have to go back to the drawing board.
It is possible, Ball went on to say, that in the future the whole pensions tax regime could be under the spotlight, as the Treasury may not be content for people in their 50s and 60s to make a quick tax gain without locking their money away.