New UK annuity reforms – lessons from the US

Photo credit: Linus Bohman (Flickr Creative Commons)
Photo credit: Linus Bohman (Flickr Creative Commons)

This week’s guest blog is from across the Atlantic. David C. John is a senior strategic policy advisor at the AARP Public Policy Institute. AARP is a nonprofit, nonpartisan organization, with a membership of more than 37 million older people across the USA.

 American experience strongly suggests that the coming UK pension freedoms sound better in theory than they will work in practice.  After nearly a decade where the UK has been the gold standard for retirement savings policy, it is about to take a step that it may regret.

As annuity purchases are not required, very few Americans buy them, feeling that they are spending a great deal of money for a comparatively small monthly income.  Even those in traditional DB pension plans usually take a lump sum if they are allowed to do so.  As a result, many US retirees spend unwisely, trust the wrong financial advisor, or make other financial mistakes.

Many people greatly overestimate how long their savings will last.  Most others assume (often wrongly) that they can manage their own money as well as anyone else or that they can live comfortably on Social Security alone.  US Social Security pays a benefit that depends on the retirees’ individual income history.  The average annual amount is about $13,000 (GBP 8,700).

One survey found that in West Virginia, a state with a relatively low average income, 78% of those near retirement and 67% of those at retirement would likely outlive their financial assets.  Workers with lower incomes are most at risk.  A recent national study found that by the 20th year of retirement, more than 81% of Americans with incomes up to $27,000 would run short of money, as would 38% of those earning up to $42,000, and 19% of those with incomes up to $65,000.  Even 8% of those with the highest incomes could not meet their expenses. Continue reading “New UK annuity reforms – lessons from the US”

Pension reforms – opportunity and risk

 

Pound coins - Photo: Flickr user hitthatswitch
Photo credit: hitthatswitch, Flickr Creative Commons 

April 2015 will represent a landmark day for pensions, with an end to the requirement to use a pensions ‘pot’ to buy an annuity. For better or for worse, people at point of retirement will hold their own futures in their hands, with decisions taken at this time having implications that can be felt for many years to come.

Age UK has welcomed greater flexibility, but it’s clear that the rapid speed of change has led to significant challenges ahead for the government and the industry, as well as – most importantly – ordinary pension savers.

Disengaged savers

Age UK recently published an independently-written report, Dashboards and Jam-jars, which looked at some of the main issues facing people with average-sized pension pots. It highlighted some of the main problems that could arise – for example paying too much tax or running out of money – and suggests what can be done to mitigate these. Continue reading “Pension reforms – opportunity and risk”