New report challenges Government over proposed pension changes

The key conclusions suggest that individuals, as a consequence of low levels of financial literacy, poor understanding of longevity risk, poor investment decisions or a deliberate strategy may run down their retirement assets too quickly and thus become entitled to means-tested benefits.

The consequences for tax payers could be devastating. Not only could there be a huge increase in claims for means-tested benefits but also a demand from those in defined benefit schemes, including public sector workers, to have their pension as a lump sum rather than as an income. There may also be new opportunities to use the pension system to create tax loopholes and there is likely to be a fall in demand for long-term bonds, including government bonds, which will occur at precisely the time that the government is issuing debt to plug the hole in the nation’s finances.

Professor Tonks comments “The most important benefit of annuitisation is that annuities protect individuals against outliving their resources. Our report focuses on the unintended repercussions of the Government’s proposals. We conclude that the current arrangements provide the most cost effective and secure system for protecting people’s quality of life in old age as well as protecting the public purse from potentially enormous additional expenditure.”

The authors of the report are David Blake, Director of the Pensions Institute and Professor of Pensions Economics at Cass Business School; Edmund Cannon, Reader in Economics at the University of Bristol and Fellow of the Pensions Institute; Ian Tonks, Professor of Finance in the Xfi Centre for Finance and Investment in the University of Exeter Business School and Fellow of the Pensions Institute.