From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    Cashing-in annuities

    Cashing-in annuities

    5 January 2015

    • Steve Webb calls for annuities to be cashed-in to extend pension freedom
    • Many would love the chance to take the money instead of a tiny income
    •  But how would this work – what penalties and charges would there be for surrender?

     Pensions Minister, Steve Webb, has called for an extension of the radical overhaul of pensions to include existing pensioners who may have bought annuities but are not happy with their deal. In principle, I think this would be extremely popular and is a chance to ensure that those who have missed out on the forthcoming pensions flexibility have some chance to be included in future.

     But didn’t the Government remove mandatory annuitisation years ago In theory, yes, but only for those with very large pension funds. In practice, most had to annuitise. Until the recent Budget, anyone who wanted to take money out of their pension fund, and who didn’t have a huge fund, was effectively forced to buy an annuity.

    Many would like the chance to undo their annuity: Over the past few years, annuity rates have fallen significantly, so that the amount of lifetime pension income customers received has been much lower. Some people have been happy to buy an annuity and, if they had help to choose the right type of product and get a good rate, they may well be satisfied. However there are many, many people who would love the chance to revisit their purchase.

    Annuities are usually irreversible: I have heard from so many who say, if the pension freedoms had been in place earlier, they would never have bought an annuity but they had no choice at the time. They never wanted an annuity, often they are receiving very little income, have no inflation protection and would much rather undo the deal. Normally, this is not possible. Once bought, most annuity deals are irreversible, with six million people locked into annuities that they were often forced to buy because the pension rules did not give them any practical alternative, or because the annuity sales process did not ensure they received sufficient help when dealing with this decision.

     So what Steve Webb is proposing is a radical departure from the status quo.

    Who is this aimed at? This idea is particularly aimed at existing pensioners, those who have already bought annuities but wish they hadn’t. Hundreds of thousands of people each year have been buying these products, with a value of over £10billion per year, so this is a huge market that affects millions. It is less likely to be relevant to future pensioners, since the new freedoms mean annuities and pension products are likely to change. However, it is a way of dealing with past problems that could be popular with many retirees.

    How will it work? That is the key question of course. The Minister seems to be suggesting that there may be a market in trading people’s annuities. So someone could approach a range of different companies who would be willing to buy ‘second-hand’ annuities and make you an offer. You might go along to a firm and say I have an annuity contract with Insurer XYZ that will pay me £1000 a year for the rest of my life. I am age 70 now, how much will you give me to buy this income stream from me? People could approach a range of different companies and see who makes them the best offer. They would then choose the firm to deal with, receive a cash lump sum (which presumably would be taxed as income in the year they receive the money) and the company they sell to will receive their £1000 a year income until they die. Obviously, the company offering to buy back an annuity will want to know the customer’s state of health, age, or other relevant circumstances in order to assess the value of the income stream. The mechanics are also likely to be complicated, because the insurer who sold the annuity would need to be told to pay the income to a different place and all parties would need to keep track of the original purchasers and be notified when they die.

    Will this just be one person at a time or could it be for groups? There is the possibility that groups of people might want to buy back their annuities, or a market could develop where annuities from people in different age or health groups are joined together into a package of annuity income products and sold on to other investors.

    Are there any precedents? There are examples of trading contracts that may be considered similar. For example traded life insurance policies and endowment policies. These contracts are written on individual lives, but were then bought and sold by other firms, with the original purchaser receiving a cash sum in exchange for their rights under the original contract. Unfortunately, the markets in these products did not work out well for many of the parties involved. The surrender penalties were often significant.

    What will it cost? This is the big question! Again, nobody knows as this has never been done before. However it is certain that there will be charges for cashing the annuity in and some form of surrender penalty. How much the customer will lose is not clear.

    Could this be done in other ways? An easier way for this to be done would be for the original company that sold someone their annuity to buy it back from them. This would not involve third parties, but of course the customer is then reliant on only one company to offer them a fair price, without the competition of a market-place. I could imagine this might work in cases where customers feel they were mis-sold an annuity in the first place and the insurer thinks they have a case for a claim. Rather than protracted wrangling, they might offer to buy the annuity back – this could even depend on whether Regulators threaten action on the basis of the FCA Thematic Review.

    So is it a good idea? I think this is definitely something worth exploring, but I cannot see it happening immediately. However, it is likely to be a popular idea with many of the five million people who have bought annuities in the past, especially those who feel left out of the new pension freedoms and would prefer to have the benefit of their pension fund rather than a non-inflation-linked and possibly rather small annuity income for life.

    10 thoughts on “Cashing-in annuities

    1. I am 67 and took out a flexible annuity 2 years ago; I could have deferred it but otherwise there was virtually no choice in the matter – it had to be an annuity of some type, at some time. When the new rules were announced last year I considered it most unfair that there was no retrospective facility for choosing cash instead of an annuity. It’s not that I want the cash to squander, that would be insane, but the point is this: with the annuity, when I die, anything left in the fund is lost (the inherited estate, I gather it’s called). But if I had the cash I could invest it in, say a buy to let (& yes, I know the issues there, it’s the principle I’m talking about, not the investment decision). But most importantly, I’d own a tangible asset that I could trade or bequeath. As things currently stand, if my wife outlives me beyond the remaining 8 years of the 10 year guarantee of my annuity, the annuity is lost to her on my death. But if I am given the option to sell my annuity (& so long as it’s sufficiently attractive a deal, without rip-off penalties) then the capital asset & income deriving from it is preserved for her & for my children to inherit.
      I sincerely hope this is brought in & that the arrangements are made sufficiently competitive & attractive that it can be a serious choice for those of us who feel left out of the equation. It is we who have suffered from the drop in annuity rates over the past 15 years or so & we should be afforded the same flexibility as upcoming pensioners.

    2. ” there was virtually no choice in the matter – it had to be an annuity of some type, at some time.” Really? How so? Income Drawdown had been available for years.

      “As things currently stand, if my wife outlives me beyond the remaining 8 years of the 10 year guarantee of my annuity, the annuity is lost to her on my death.” Good God, why didn’t you buy a joint life annuity?

    3. It seems a rather bizarre scenario, in which financial institutions buy up annuities that pay money to them based on how long some other person lives. Odd to think that by staying alive you would be helping to support a company’s income stream! Weird and convoluted, but if that’s the only way out of them then I suppose it could be a good thing.

    4. I took out an annuity about 18months ago and also feel fairly cheated by the about to be implemented changes. I bought an annuity partly because of the pending and much publicised gender equalisation that was supposedly going to adversely affect rates for males. However I have seen no real evidence of this. I would welcome the opportunity of at least investigating reversing the purchase of my annuity.

    5. 12 years ago I was ready to take an Income Withdrawal account when the government increase the minimum pension pot from 50K to 100k. As I only had 80K after taking the tax free cash I had no choice but to annuities my fund. I was left with approx 5K pa gross pension with no indexation. A friend of mine with similar funds took the IWA before the increase. After 12 years of taking the maximum income he still has a pension pot of over 85K. He has now switched his pension to the new Income drawdown account to all him maximum benefits ….I feel robbed.

    6. My father in law took out an Annuity with a 5 year guarantee and 25% cash in 2010. He died and then his wife died last year. My wife now gets the Annuity until the 5 years is up – Oct 2015. I worked out that of his £40K pension pot we will have had £18K. MGM have scored for £22k plus interest!! can not be right!! Any suggestions??

    7. I like many others had no option but to buy an annuity. I was given bad advice at the time and had never even heard of an annuity so totally in the dark. What made me angry was that i am in poor health and friends life didnt offer an enhanced annuity. My pot was not huge giving me £500 per year. I have had 2 payments and if i died tomorrow they keep the lot. I wonder how much money they have made from people that have passed away. Very unfair to be forced into something i didnt want. The new rules will let me cash the annuity in but i will be so so carefull to ensure i do not get snared and ripped off

    8. My wife just recently passed away.i receive £80 per month of an anuity which i was forced to take out at 65 .If my wife had survived me she would only have got half the ammount paid until her death.That would simply not have been fair. Ipaid a personal pension for years as being self employed thinking i would get a good return and all as a cash lump sum. What a shock i got.All this anuity does is prevent me from getting state benefit.If i die shortly they will have made a packet.High time something was done.Not a fair way of using your pension money that you paid in.

    9. Hi,

      I am 66 in december 2016. I get a small annuity once a year from Friends Life. The amount is £500. I want cash it in can I do this?


    10. My husband died in 2010 before the pension changes. I was told I had no choice but to buy an annuity with The protected rights which amount to approximately £166.00 per month. I chose not to be forced into an annuity and haven’t accepted any monies from the provider, Standard Life, whom I have found incredibly difficult to deal. I waited until my retirement having been advised that I would be able to take the accrued lump sum of approximately £13,000into without paying tax. Now however, this seems not to be the case. What advice can you offer.

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