UK households issued high stakes pension warning as government admits major fault (Image: Getty)
The Government admitted that the UK pension system does not support people through “high-stakes” retirement decisions, as it issued a major pension update. Labour laid out proposals to reform workplace pensions to “improve retirement outcomes”, under which the vast majority of people would be offered default pensions.
Labour said these are designed to provide a sustainable pension income without requiring individuals to make complex decisions unless they choose to do so. The Guided Retirement proposal comes on the back of identifying flaws in the current system following the introduction of automatic enrolment (AE), which requires all employers to automatically enrol eligible staff in a workplace pension scheme.
While Labour said it encouraged millions to save for their retirement, auto-enrollment “does not yet have a pension system that supports people through retirement”, with high-stakes decisions often left down to the individual.
The guiding principles for Guided Retirement, released on July 13, read: “Because most people do not take regulated financial advice, individuals approaching retirement are currently expected to make difficult judgements about how long they might live and how quickly they can afford to draw down their pension.
“The Government has worked with the Financial Conduct Authority (FCA) to ensure more support is available in future, but notwithstanding this, individuals face complex decisions that are very high stakes. Poor decisions at this stage can significantly affect whether a pension provides income throughout later life.”
At present, members decide how to manage their assets to ensure retirement income that lasts throughout their later life, raising concerns about longevity.
The Government said it considers protection against longevity risk a “crucial” element of default pensions, and so they must provide a retirement income that lasts throughout retirement.
Trustees and scheme managers will have flexibility about how to deliver this, and so default pensions could incorporate different phases, such as a flex then fix approach.
However, Labour added that this will “inevitably involve wrestling with trade-offs – not least between flexibility and risk”, though it pointed out that savers making their own decisions inevitably face the same trade-offs.
In view of this, it argued that default pensions will “reduce the risks and complexity entailed by members having to make the decisions for themselves, while ensuring each individual absolutely has the option of doing so.”
Alongside the introduction of default pensions, the Government committed to “freedom of choice”, particularly for individuals with higher levels of pension wealth or complex circumstances. It added: “These freedoms are not being eroded by the introduction of default pensions.”
“Alongside introducing default pensions, the Government is committed to ensuring that individuals can get the right support with their pension choices, including through high-quality financial advice, Pension Wise, and the introduction of targeted support, where it is made available,” it said.