What Labour’s shock pension plan at hand you an revenue for all times means to your retirement

Millions of pension savers could be automatically handed an ‘income for life’ when they reach retirement in a surprise reform announced by the Labour Government yesterday.

Workplace pensions are in for a monumental shake-up that will change the way pensioners are paid each year under the plans for a so-called ‘guided retirement’.

Under these radical reforms, private sector workers would be enrolled by default into a pension that is guaranteed to last throughout their old age.

Although people could still choose another way to fund their retirement, the proposals represent a major step away from the popular ‘pension freedom’ reforms launched just over a decade ago.

The pension freedoms handed anyone over the age of 55 the power to spend, save or invest their retirement pots however they want. 

The reforms removed the need to buy an annuity, the traditional way of securing a guaranteed income for life, and allowed people to invest their pension in the stock market and live off it in retirement instead.

But now the Government is in favour of ‘guided retirement’ becoming the default for savers when they stop working.

So how would this new system work? Money Mail answers all the key questions.

What’s changing?

The Government has asked the public and the pensions industry to respond to its proposals to reform the system for private sector workplace pensions.

These changes are under consultation and have not yet been confirmed nor a timeline specified. However, Pensions minister Torsten Bell has shared his vision for a new ‘guided retirement’ system.

Bell says: ‘We are resurrecting proper pensions for private sector workers, guaranteeing them the option of an income that lasts throughout retirement and in many cases protection against the rising cost of living – things public sector workers take for granted.’

Under the proposals, private sector pension schemes would give savers the option of taking a stable income for the rest of their lives ‘without having to become investment experts overnight’.

This refers to the current system, under which workers are responsible for overseeing the way their funds are invested and ensuring their pension pot lasts until the end of their lives.

Bell says this means that, once someone with a defined pension reaches retirement, they are expected to become an actuary, an investment manager and a fortune teller. He says: ‘Individuals will have the ability to make other choices. 

But default pensions will ensure everyone has a route to a decent pension income that is sustainable for the rest of their lives. In short, they will make pensions, pensions again.’

Savers would be asked screening questions before being offered the default option of a guaranteed income, unless they declare that they want to invest their pension pot themselves and draw from it as and when they like.

Is this different from an annuity?

There are some key differences. Firstly, the payouts under the proposals might not be guaranteed in the way that annuities are.

With an annuity, you hand over a lump sum of money in exchange for a contract promising to pay you a certain amount of income every year for the rest of your life.

The new pension programme would see your money invested in a collective workplace pension scheme, where it would be pooled with others and invested for you.

It would aim to achieve a sustainable, inflation-adjusted income by pooling risk, but your payouts could fluctuate based on fund performance.

Will I be better off?

In theory, these pensions should pay a higher income in general than annuities because they will invest in higher risk as well as higher return investments than annuities, which typically buy into cash and bonds.

The Government is exploring the option of the default being a Retirement Collective Pension Scheme, where retirees would share investment and longevity risks. 

But it is up in the air whether you would end up better off than if you invested your pension.

Is anyone excluded?

The Government suggested pension providers would not need to guarantee an income for life where someone has less than £10,000 saved in pensions with them.

Those with very high-value pots in workplace pensions could be excluded, as they are likely to face fewer challenges in managing retirement income decisions.

The Government is open to extending ‘guided retirement’ to privately held individual self-invested pension pots (Sipps), but savers with small pots worth £1,000 or less could be excluded.

Can i still leave a pension in my will?

Surviving spouses and children can inherit invested pensions, and the Government has asked potential pension providers how this could be incorporated into default schemes in future. 

However, it is unclear what inheritance rights would be available. 

In public sector pensions, which this plan seeks to emulate, pensions cannot typically be passed on to anyone other than a spouse or dependent. 

Annuities cannot be inherited unless you purchase one designed to pay out after your death.

Can I stick with current system?

Under pension freedom rules currently in place, most people who work in the private sector save into their pot throughout their careers and then live on this money and the investment returns it produces.

Savers can still choose this path, but default options have an ‘anchoring’ effect and can have a big impact on where most savers end up, according to former pensions minister Steve Webb, who designed the current pension freedoms.

‘The Government is right to say that managing a defined contribution pot in retirement through the ups and downs of markets, and with no idea how long the pot needs to last, is challenging,’ he says.

‘So the basic idea of “guided retirement” is welcome. But there is a danger that the Government’s hostility to pension freedoms will lead them to promote lifetime income solutions too heavily.’

Webb, who is now a partner at pension consultant LCP, adds: ‘If people want a secure income for life, the option of buying an annuity has always been there, but very few people freely choose it.’

Industry lobby group the Association of British Insurers says: ‘It’s important people continue to have the freedom to make their own decisions. For these rules to work in practice, people need a clear and consistent journey when accessing their pension.’

Do I have to wait?

If you’re interested in a guaranteed income for life, but don’t want to wait for or would rather avoid the proposed offering, you could look into annuities.

Annuities provide a guaranteed income until you die, and higher interest rates in recent years have allowed providers to offer more attractive deals after years when they were in the doldrums.

A healthy 65-year-old who has £100,000 in their pension can currently lock in an income of nearly £8,200 a year until the end of their days, according to best buy data from Hargreaves Lansdown.

In the same scenario and for the same price, a single life annuity that rises 3 per cent annually and has a five-year guarantee period – protecting your cash immediately after purchase – can generate £6,100 a year.

The same person with a spouse three years younger could buy a joint life annuity with inflation protection but no guarantee that provides £5,600 a year.

Annuities now have more flexibility than they used to, with savers being able to buy a fixed term or a lifetime options, and spend more to get inflation protection.

You might be able to get an ‘enhanced’ rate if you wait to buy an annuity until you are older and your health has worsened.

And you can get an annuity with a ‘guarantee period’, which protects against the loss of all or most of your purchase money if you die shortly afterwards.

Once an annuity has been purchased, you are locked in so you can’t reverse the decision.