15th March 2015
The pensions revolution rolls on! Pension freedoms extended to current pensioners too
At last, some hope for millions of people trapped in products they never wanted to buy
Of course there are risks, but Regulator and Pension Wise can help protect customers
The Treasury will consult on how best to establish a market for second-hand annuities. This will be popular option with many of the five million or more people who have bought annuities in recent years.
Annuities have become worse value but people still forced to buy: Annuities have become much worse value since the start of this century, but people were still forced to buy them as there was no other way for many to take money out of their pension funds. The rules required anyone who wanted to withdraw some cash from their pension savings to ‘secure an income’ and if they did not have very large amounts in their fund, they had no other option – they had to buy an annuity.
Those with largest pension funds could avoid annuities: Those with large funds did not have to annuitise, but the vast majority had no choice. And, until now, once they had bought the standard type of annuity, they had no chance to change it, they were stuck with it for life. (Selling the annuity income might have been theoretically possible, but would face a tax charge of between 55% and 70%, so this was not a realistic option).
Government will consult on second-hand annuity market: Of course, the Chancellor’s last Budget swept away those old rules, but those who had already bought an annuity seemed stuck. Not now though. A consultation will start on 18th March on how best to establish a market for second hand annuities.
Why might people want to sell their annuities? Those who were forced to buy an annuity under the old rules but never wanted to have been writing to their MPs to complain about the unfairness of being forced to buy an irreversible product, when they would not need to do so under the new rules. There are many who would much prefer the lump sum, or the chance to leave the money invested. For example:
- They may have significant other pension income – this pension fund might have been an AVC (Additional Voluntary Contribution) fund that supplemented a guaranteed final salary pension. Someone receiving £20 a week from a £20,000 AVC, might prefer to have a cash lump sum, even if the amount is discounted for transaction costs.
- They may have large debts, or a mortgage, that they want or need to repay
- They may need money to pay for health or care needs or other urgent spending
- If someone has become very ill and is unlikely to live long, or needs to pay for care, they might find a lump sum more useful, even if it is much less than their original pension
- People who had several pension pots and annuitised them might now prefer to take some as cash, or leave them invested in a new-style drawdown fund.
From April 2016 people should be able to sell their annuity for a lump sum or drawdown: From April 2016, the Government intends to start a market for people who want to sell their annuities to the highest bidder. The amount they receive in exchange for their annuity income can either be taken as a lump sum, taxable as income, or put into a pension drawdown product and any withdrawals would then be taxed as income.
This is an option people didn’t have before: Most people will probably decide to hang onto their annuity, but many may have good reasons to want to consider selling it on. They will not be forced to, it will be up to them, but at least they will have the choice to do so, whereas until now their fund was gone for ever.
Isn’t there a risk of another mis-selling scandal? Of course there are risks. But the risks are no different to those which exist under the new pension rules and allowing people the option to cash-in just addresses some of the unfairness between the past and the future. Commentators have criticized the proposals on the grounds that customers are likely to receive very poor value, as they will be offered very poor value and charged unfairly high sums to cash-in their annuity. They note that people often received very poor value and paid high charges to buy the annuity in the first place and will now lose out a second time when selling it back. It is certainly true that many people bought poor value, unsuitable annuities, but that is not a reason to deny them the chance to undo the deal.
Customers need protection, guidance – and ideally advice: Given the risks of customers receiving poor value, the Treasury needs to ensure that the FCA regulates the second-hand annuity market carefully. Customer protections must be put in place, since pricing an annuity is a complex transaction and, especially if there are few players in the market initially, it is important to have checks and controls on pricing structures to ensure customers are treated fairly. The Government is also planning to consult on how the Pension Wise service can be extended to offer people financial guidance so they understand the risks of selling their annuity and help them find a good rate – although ideally, they would take independent financial advice.
Only fair to give them a choice: Nobody will have to sell their annuity, it will be their choice. Unlike when they purchased it, they will not be forced to cash it in and many will not wish to. However, giving them the option is only fair. Many of those who bought annuities understandably feel aggrieved that their money has gone to an insurer in exchange for a relatively low income with no inflation protection, whereas future pension savers can enjoy full freedom to choose what is best for themselves. This is a popular and sensible decision which will be warmly welcomed by many.