PMI: From bank accounts back to good old pension provision

The statistical evidence, such as it is, suggests the tendency to full encashment has been confined to small funds.

However, the UK’s DC market is still relatively immature, and it is reasonable to assume that those old enough to encash DC pots are likely to have other assets available to provide a post-retirement income.

There is a common assumption that the public will come to regard pension schemes as a sort of tax-favoured Christmas club

It is likely to be another 20 to 30 years before we see a significant cohort of retirees with no defined benefit savings at all, and by that time the UK DC market is expected to be significantly larger than it is today. 

There is a common assumption that the public will come to regard pension schemes as a sort of tax-favoured Christmas club.

Those reaching the age of 55, we are told, will enter a regular cycle of accumulation and encashment – think of the Daily Mail headlines describing pension funds as ‘bank accounts’.

Tipping point

However, the lessons from other countries suggest that as DC saving becomes more established, fund sizes will grow.

This in turn leads to a tipping point when a fund achieves a certain milestone value and members become actively engaged in the management of their savings.

In an era where the average fund value is comfortably in excess of £100,000, it is probable that members will start to be more interested in using their savings to provide for their retirement. 

Practical assistance at the point of decumulation will become particularly important, and Nest is to be congratulated for its recent initiative in proposing a default decumulation option for those leaving the scheme in future years.

There have recently been a number of commentators – and many of them ought to know better – claiming that it is no longer important for those of retirement age to have a regular, secure and adequate income

An uncomplicated approach that combines regular income, cash sums and longevity hedging shrewdly anticipates the decumulation requirements of the next generation of retirees. 

We should take comfort that future plans focus on providing income rather than cash payments.

There have recently been a number of commentators – and many of them ought to know better – claiming that it is no longer important for those of retirement age to have a regular, secure and adequate income; something that those of us of a particular vintage used to call a ‘pension’.

Shifting policy away from traditional pension provision towards the more nebulous concept of ‘retirement savings’ has been a dangerous distraction, and we should work to ensure that the core requirements of those reaching retirement age continue to be met.

Tim Middleton is technical consultant at the Pensions Management Institute