By Anne-Marie O’Donnell
Concerns have been raised that workers who become unemployed in their 50s could be forced to draw on pension funds instead of benefits under new pension changes from the UK government.
In this year’s budget, Chancellor George Osborne unveiled a raft of changes to the public’s access to their pensions – described a “possibly the biggest” changes in a lifetime by Institute for Fiscal Studies director Paul Johnson – and the plans were initially welcomed as an opportunity to give savers greater control over their money.
However, questions have now been raised over the detail of the plans and whether some pensioners could be left worse off, while some pension and retirement companies warned that the current business model could be “irrevocably damaged” by the changes.
In the latest of a series of concerns from commentators and analaysts, Angus MP Mike Weir has called for clarification on how the changes will affect workers who find themselves unemployed in their mid-50s and under new rules have greater access to pension funds. The SNP MP raised concerns that the Department for Work and Pensions may begin to consider pensions as a new form of income and refuse to pay out unemployment benefits, forcing claimants to use up their retirement funds.
“Under the new rules savers will be able to draw down their funds at any time over age 55 and there will be no requirement to purchase an annuity,” said Mr Weir. “I specifically raised with the pensions minister Steve Webb as to whether these changes will lead to the new funds being treated differently by the DWP when someone in their late fifties finds themselves, say, out of work and having to seek means tested benefits.
“Clearly a traditional pension is not accessible in these circumstances, yet one of the “new” types may well be treated as savings rather than a pension and could well be accessed. The result could be that a period of unemployment could conceivably wipe out someone’s pension savings.
“Steve Webb did not address the issue but instead talked about group pensions having an employer contribution. Many people, however, still have a personal pension and this could have a significant effect.”
He added: “It is vital that the UK government clarify the position since it will be a significant factor for many people in determining how they save for retirement.”
The changes mean that savers who invest money private pension schemes will have greater freedom over how they access the money. Currently, savers with less than £18,000 in total pension savings can withdraw the entire amount from the age of 55, with 25 per cent of the sum tax free. Those who have saved more than £18,000 can take up to two pensions as lump sums, subject to income tax.
The vast majority of pensioners instead buy an annuity, which is a form of insurance that guarantees a monthly income until death, while some leave pensions invested in the stock market and withdraw income gradually.
Under the changes, which take full effect from April 2015 – although the UK government will introduce temporary measures to allow some more access in the meantime – pensioners will be able to access the entirety of their pensions at any time after the age of 55, with 75 per cent of the sum taxed at marginal rates.
While Mr Johnson of the IFS said that there were clear advantages in giving people more control of their money and the changes would likely increase the incentive to put money into pensions, he warned that one major drawback would be people’s own underestimations in how long they will live.
The IFS also warned that the government’s expectations of income from tax receipts may be badly calculated, estimating that tax receipts would likely peak in 2018/19 and then begin to dip, meaning that policy could actually start increasing the deficit within 20 years.