Lifetime pension income to be revived for 17 million private sector workers

Ministers are proposing a new guided retirement model aimed at giving savers lifelong protection.

Millions of private sector employees could be offered a guaranteed income for life under new rules designed to help them make better use of their retirement savings.

During the past three decades, most final salary pension schemes that paid a fixed income for life have closed. As a result, workers have increasingly saved into pots of money and then had to decide how to use them when they retire.

The removal of the requirement to buy an annuity, which provides an income for life, left many savers unsure how to manage their retirement funds.

The government's proposals would create a default retirement option intended to ensure that money saved in pensions can provide an income throughout later life.

Under the guided retirement system, people would still be able to take out their money or invest it elsewhere, but they would also be offered a straightforward option, often with payments linked to inflation.

The government said the changes would affect 17 million workers who are paying into a pension.

Auto-enrolment, introduced in October 2012, has helped increase savings by requiring employers to place every worker aged 22 and over into a pension scheme and make a company contribution.

Although workers can opt out, nine in 10 eligible private sector employees are now contributing to a retirement fund, up from four in 10 in 2012.

Even so, many retirees still struggle to decide what to do with their money. The government said nearly half of the pension pots first accessed in the latest full year were emptied completely, leaving people exposed to the risk of outliving their savings and relying only on the state pension.

The pensions minister, Torsten Bell, said: “Private sector workers deserve a much better deal when it comes to pensions. They are doing the right thing and saving for retirement, but when they get there too many are left without a genuine pension.

“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.”

Pensions specialists welcomed the move, but said retirees should still have the chance to decide how they want to use their savings.

Yvonne Braun, director of long-term savings policy at the Association of British Insurers, said the proposed scheme could make decisions about accessing pensions simpler, but it was important “that people continue to have the freedom to make their own decisions”.

Although annuities are no longer a compulsory part of retirement planning, sales have remained strong because of higher returns for investors and changes to inheritance tax rules that have encouraged wealthy savers to move money out of their pensions.