January 2008

In favour of one system

Dear Editor,

A-Day pension simplification should be followed up by an 'R-Day' rethink to encourage those reaching retirement to actively seek out the best value for money from their accumulated pension pots.

The UK has two sets of rules - for secured and unsecured pensions - mainly for historical reasons but the effect has been to create a market polarised between the wealthy few who opt for income drawdown and the mass market who are funnelled into lifetime annuities.

Scrapping the two rules in favour of a single system would help to remove complexity, aid product innovation and give retirees more flexibility to react to changing events during retirement.

But how much of the extra benefit will be lost by people failing to seek out the best deals when they reach retirement?

The open market option is useful but remains underused and is still too often regarded as a right to choose a better paying lifetime annuity when it actually refers to the right to choose from the whole spectrum of retirement income products.

A shake-up could help put the spotlight on the key decisions to be made at retirement. Increased flexibility is probably more of a benefit to the mainstream market than to the wealthy elite because it is those with more modest pension pots who need to make every penny count and the difference between a good and bad decision can easily add up to thousands of pounds over the course of a retirement.

An R-Day rethink could help focus people's minds on the enormity of the decision they face at retirement, encouraging them to make more informed choices while also enabling the industry to develop a host of new and innovative products.

Kim Lerche-Thomsen
Founder and Chief Executive
Living Time