18 October, 2016

Thousands Of People Will Feel Let Down By Government Decision To Abandon Secondary Annuity Market

Major disappointment for thousands of people:  The Government’s decision not to proceed with its proposals to allow people to sell back their annuity income will come as a major disappointment to thousands of people.  Many have been waiting anxiously for the opportunity to undo the annuity they were forced to buy and will feel let down by today’s announcement that the secondary annuity market is being scrapped.

Many will be stuck for the rest of their life with an annuity they never wanted:  This was never likely to be a huge market, but for some individuals it would have been a potential lifesaver.  Those who bought an annuity because they were forced to do so, but would not have purchased one unless the law required it, have been waiting desperately for an opportunity to sell it but that opportunity is now being taken away from them.

Consumer protection is, of course, vital but the Government announcement of another overhaul of financial guidance has meant PensionWise cannot now help people before April 2017:  Of course it is vital that consumer protection is put in place to help people understand the value for money they would be offered, but that was going to be offered by financial advisers and PensionWise.  The Government’s most recently announced overhaul of financial guidance has made the Pension Wise route impossible because the whole guidance landscape is now up in the air.  PensionWise Guiders were waiting to be trained to give the guidance for people before the secondary annuity market started in April 2017, but the latest announcement of further rethinking of the Government’s free help for customers has resulted in today’s decision.

Being able to sell the annuity would be better for many than being stuck with a small lifetime income, with no inflation or spouse protection: The Treasury says that only 5% of annuity holders would want sell back their annuities  but this is still a huge number of people.  Around 600,000 annuities were being sold each year and most of these products offered no protection against inflation and did not ensure a spouse would be covered.  Some of those buying annuities would have had other pensions, many from a final salary-type scheme, so they did not need this extra guaranteed income but had to buy it because that was the law at the time. Unless they had very large pension funds, they had no choice but to buy an annuity, whether they wanted to or not.  5% of those buying annuities amounts to around 30,000 people a year who might want to exchange their small annuity income for a cash lump sum.  In many cases, the annuity that they bought has no inflation protection and does not provide for their spouse, whereas having the cash would allow them to make provision for their partners or repay debts.

This aspect of pension freedoms is being abandoned and will leave many disappointed:  It is a shame that this aspect of the pension freedoms is being abandoned and that the overhaul of pensions guidance seems to have undermined a potentially valuable service for people who will now be stuck for life with an annuity that they did not want to buy and may not be the most suitable product for their retirement needs.  It was never going to be a huge market, but for some people it would have been a real benefit to be able to undo their annuity.

14 October, 2016

FCA finds clear evidence of annuity mis-selling to customers in poor health but process of investigation and redress is painfully slow

• Seriously ill customers short-changed for the rest of their shortened life – need swift action
• Tens of thousands in line for redress
• At least one in three firms have failed customers and will have to compensate
• FCA findings welcome but customers need urgent action not still more reviews

FCA findings from its investigation of whether annuity customers in poor health were treated fairly: The FCA has just released its findings following an investigation into how annuities have been sold. Link here https://www.fca.org.uk/publication/thematic-reviews/tr16-7.pdf . The results are further proof that the annuity selling process has failed customers.

Customers in poor health have been short-changed on their pension income for the rest of their shortened lives: In 2008, the FSA first reported that annuity companies were not treating customers in poor health fairly. Since then, companies were supposed to change their practices to ensure they treated customers fairly, but here we are, eight years on, and not enough has been done.

At least one in three annuity companies has been found guilty of serious failings: Seven firms were investigated and a ‘small number’ were found to have seriously failed customers and will be required to pay redress. If this ‘small number’ is two firms that still represents 30% of the firms. If it is three firms, that represents over 40% of the sample.

FCA is only just starting to look at others, but still not the whole market: On the basis of its findings so far, the FCA is now going to investigate some of the other providers. Of course it is good that this issue is receiving more attention, but we are already another two years on and it will still not be looking at all of them. Many of the smallest companies may have had the worst practices, yet their customers are not being helped at all. The FCA’s Report today will still not help all the customers who were sold inappropriate annuities in past years.

Study found ‘relatively high incidence’ of failure of process and breach of FCA rules: It is worrying that the FCA study found that most of the firms were not selling annuities properly. Such failures are of concern, even if the FCA concludes that people may not have suffered losses in the majority of cases. Given the huge numbers of people involved, even a small proportion of customers is a large number of people.

Tens of thousands already in line for redress but may be many more to come: The FCA indicates that its findings could mean at least 90,000 people will need compensation for wrongly sold annuities, but it is still investigating more firms and there is bound to be more redress due. This is taking many years. Urgent action is so important because the annuity market since 2008 has covered over three million people. Many of those worst impacted by any failure were in poor health and will have been living on much lower incomes than they are entitled to, some may have already died. At the moment, these annuities are completely irreversible so customers will be poorer for life if they receive no redress.

There were no proper suitability checks or requirements to ask about health: The way annuities have been sold, without any suitability or ‘know-your-customer’ checks, makes it inevitable that many people will not have had the chance to make best use of their hard-earned pension savings. Companies were not required to ask customers about their health. They did not have to tell customers that a standard annuity assumes they are in excellent health and will live longer than average. So customers often had no idea that if they had past health issues, such as heart trouble, high blood pressure and so on, they could have obtained higher income by buying a different type of annuity.

Just sending a leaflet is not enough to address customer detriment on annuities: The FCA only requires firms to send written communications i.e. an official leaflet that describes the different types of annuities, or something equivalent. But most people do not know anything about annuities. Most customers, who will only ever buy an annuity once in their life, have no idea what the words ‘enhanced’ or ‘impaired life’ annuities mean for them. The asymmetry of knowledge and power works against customer interests in this market more than most others.

Frustrating that it is taking so long for redress for those affected: It is very sad to see that so many years have already passed and redress is only just now being considered. And this will not apply to all customers, with other firms only just starting to be investigated. I would like to see much quicker action, given the importance of annuity income to pensioners in poor health

FCA must monitor how second line of defence is working for annuities sold since 2015: The requirement for most people to buy annuities was thankfully abolished in the 2014 Budget, but many people are still buying an annuity to secure a lifetime guaranteed income. The Government promised there would be better checks to protect annuity customers, and the FCA needs to investigate how this so-called ‘second line of defence’ is working in practice. The proportion of customers buying from their existing provider has been rising and that suggests there may still be a need to improve selling processes. In particular, the FCA needs to ensure customers who are not in excellent health do not just buy a standard annuity. Greater use of PensionWise free guidance would help give customers a better chance to buy the right product.

As most readers of this blog will know by now, I have been appointed Minister for Pensions in David Cameron’s new government.

Having spent so many years studying pensions, savings and retirement policy as an independent expert, I have the chance of working inside government to drive things forward.  It will certainly keep me busy and be a great new challenge.

Recent years have seen sweeping changes to our pensions system, changes which have started to move pensions in a positive direction for the first time in years.  I now have the responsibility of continuing and building on this momentum.

Believe me, I am aware of the hard work that lies ahead.  I want to make pensions work better, be more easily understood and more popular.  For me, pensions have always been about people, not just about money and I will always try to bear that in mind in my policy deliberations.

We must continue to ensure today’s workers can save for their retirement with confidence. Automatic Enrolment has encouraged more than five million people into a workplace pension – but we still have a further five million to go, as the system continues to roll-out.  Opt-out rates have been encouragingly low, but so are the minimum contributions and of course we will need contributions to increase over time.

This is hugely important – most of us can expect to live longer than ever before and must save for our futures if we are to enjoy our later years in relative comfort. I am aware of the challenges of making the second half of the Auto-Enrolment roll-out go as smoothly as the first, and am conscious that the particular needs of smaller and micro employers have to be considered.

It has been really encouraging that the youngest workers have been those least inclined to opt out after being enrolled. But we mustn’t become complacent – we need to do all we can to ensure protective measures are in place to cement people’s trust in their pension investments and encourage engagement.

We need to improve consumer protection and financial education to help people understand more about getting a fair deal and the value of saving. As successful as Auto-Enrolment has been up to now, we cannot just assume the job is done.

I believe passionately that the new pension freedom reforms have made an historic difference in allowing people to make the most of their hard-earned savings. They provide consumer choice for all, not just the wealthiest, rather than forcing most people into buying an annuity that may not be suitable for their needs.

I have been saying for years that we must trust people with their own money – and I believe most British savers will be responsible when it comes to making these long-term decisions.  With the help of Pension Wise guidance, improved financial education and ultimately advice, many more people can make sensible decisions for themselves. Encouraging more later life working, particularly part-time, also has the power to benefit many people if they want to increase their lifetime income.

Towards the end of the last Parliament, the Government announced that the new pension freedoms could be extended to those who already have annuities – I very much hope this will become reality.

Next April will see the roll-out of the new State pension. This long-overdue reform will see today’s complicated multi-tiered system of basic and additional State Pensions ultimately replaced with a clearer, fairer, single-tier payment.  People need to understand what is happening to the State Pension and we must try to explain it more clearly, despite the complexities of the existing system.

It will benefit many – but it is not yet fully understood.  Importantly, it will bring an immediate and significant reduction in the proportion of pensioners on means-testing.  I have long warned that we must reduce means-testing penalties, so that people, especially the poorer pensioners, are not penalised for past saving or for continuing to work longer if they wish to.  We need to incentivise private provision, rather than penalise it.

And this is all just the start. My in tray is ever growing and I can expect a busy and exciting time ahead.  Please give me some time to settle in, consider the landscape and work my way forward with the tasks that need to be done.  I will do my very best to help in as many areas as I can, but I cannot make any announcements at this stage and it is not reasonable to expect instant action.  It will take a while to assess what is best.

Due to the demands of my new role, unfortunately I won’t be able to maintain this blog for a while. But don’t expect to stop hearing from me!

From inside Government I intend to remain dedicated to championing the rights of consumers and standing up for fairness, while working closely with the industry as we all adapt to the changing pensions landscape.  Ultimately, it will benefit everyone involved in pensions if we can find ways to improve customer experience and satisfaction.

It’s an exciting time for the world of pensions and it is essential we continue the progress for today’s pensioners as well as for future generations. I will try hard to make pensions work better for people and hope to be able to make a real difference. I would like to thank all of you who have offered me your support, kind comments and warm words – I will do my best to achieve success.

6th April 2015

• Pension freedom is great news for pensions – new rules make them more user-friendly, now industry needs to help customers benefit from the changes
• Don’t be in a rush to take money out of a pension and suffer the tax consequences
• I believe most people will be responsible with their money, I trust people
• Pension Wise is there to help – make sure you use it 030 0330 1001

From today, April 6^th 2015, the rules governing the UK pension system will change dramatically.  I believe most people will be careful and use their pension savings wisely, to suit their own needs.  Those who have been responsible enough to save for their retirement are unlikely to suddenly spend it all just because they can.  They will want it there for later life.  Indeed, these new freedoms – and the removal of the 55% pension tax on death – should mean more money coming into pensions and staying in pension funds for longer.  That should mean less pensioner poverty in future.

Flexibility makes pensions more attractive: Instead of being one of the most inflexible pension systems in the world, the new rules enable pensions to be more user-friendly, making it much safer and more attractive to save in a pension fund.

Government won’t tell you what to do with your money – will trust you to know what’s best for your own circumstances:  Whoever you are, you should – at least in theory – have control over your pension money, rather than the Government dictating what you must do with it.  People much prefer to have control and flexibility.  (In practice, many pension firms may not allow you the new freedoms and, although that is very disappointing, you should usually be able to move your money to another fund (although again your pension firm may penalise you for doing so).

Old restrictions being removed:  The old rules meant that, unless you had huge (or very small) amounts of pension wealth, your pension money was locked in for life.  Once you had put the money in, you were severely restricted in the way you could take it out.  And any money left in your pension fund when you died was taxed at 55%, so you really didn’t want to have too much in there. This is all changing now.

Not forced to buy particular insurance products, can keep money for later life and pass on what’s left tax-free:  You will not be forced to buy a specific product with your pension and any money left when you pass away can go to your loved ones tax-free – no inheritance tax and no income tax – as a pension for future generations (if you die after age 75 they will only pay tax from next year if they take the money out).  These new rules make pensions far more attractive than ever before, and should mean more people saving more money in pensions, which can support them better in later life.

Pension income from annuities has fallen sharply – now people won’t be forced to buy, can wait:  Under the previous inflexible system, the law said that, as soon as you wanted to take even a tiny sum out of your pension fund in later life, you had to ‘secure an income’ which, for most people, effectively meant you had to buy an insurance product called an annuity.  This meant an insurance company took your pension fund and promised to pay you a guaranteed amount of income for the rest of your life.  That amount was usually fixed for ever, with no chance to change it and the amount of income the insurer promised to pay you was determined by the interest rates it could earn on your money and how many years it was expecting to have to pay you for (i.e. how long you were expected to live).  As interest rates fell and life expectancy forecasts increased the amount of pension income you received from an annuity declined sharply, leaving many people disappointed with their pension.  Now they have a chance to wait longer before deciding what to do, leave the money invested and either hope that interest rates will rise again, or that investment returns will allow the fund to grow and eventually get more pension.  Many people were buying annuities at much too young an age and it is much better to wait, especially if you have other pensions or are still working.

New rules give same flexibility to everyone as were already enjoyed by wealthiest – that’s fair: If you had a pension fund worth around £100,000 or more, you were allowed, under the old rules, to put your money into an income drawdown product, but even with this product, which let you keep your money invested rather than locking it all into an annuity, the Government imposed severe restrictions on how much of your fund you could take out each year.  Those with the very largest pensions (total pension income over £20,000 a year) were allowed to take all their fund out as cash if they wanted to even in the old system.  Now the same rules apply to those with smaller funds as were already allowed to the wealthiest.  I believe that is fair.  Why should the Government assume that those who have less money are not capable of making good decisions?  Everyone should be trusted to spend their pension money as suits them best.

Unfortunately, many pension firms or company schemes won’t let you have the new freedoms – they’ve been slow to act:  Not all pension companies or company pension schemes are going to allow you the freedom the law says you can have.  Although some companies have geared up to serve their customers, many will not let you just take your money out if you want to, they may force you to pay penalties to switch to another firm.  They claim the reforms have been introduced too quickly and they haven’t had time to adjust.  Certainly the Regulator has been slow to clarify the precise requirements, however the companies have known about the freedoms for 13 months.  Most industries have to adjust to new circumstances rapidly, they can’t expect to the world to stand still for them.  For example, when oil prices halved in a month, companies had to adjust.  Many pension firms have not invested sufficiently in customer service and new systems that are needed to be adaptable to the modern financial world.

Fears of people cashing-in pensions and falling back on means-testing are overdone due to New State Pension reforms:  Some have commented on fears that people will simply cash in their pension fund and ‘throw themselves back on the state’ leaving taxpayers to pick up the bill for more means-tested benefits.  This fear is hugely exaggerated in my view, particularly in light of the radical reforms to the state pension which start in April 2016.  In the previous system, nearly half of pensioners had income below the Pension Credit means-testing level so any private income you had (whether from other pensions or from continuing employment) was penalised in the means-test, meaning state pensions undermined private pensions.  The New State Pension aims to ensure most people’s pension income is above the £150 or so means-tested Pension Credit level, so any private income should no longer be penalised as before.  There will be a transition period but for younger people the aim is that state pensions provide a safe base on which private pensions can be built, without penalty.  In other words, in later life, if you cash-in all your pension savings, you will just have to live on the state pension of around £20 a day, and should not expect more from taxpayers than someone who has kept their pension savings in tact to see them through retirement.

Fears of scams are valid but fraudsters have always been there, people must be wary:  Clearly there are risks that people will fall prey to scammers or fraudsters, which is why they need to be warned clearly about the risks.  If you are called, texted, emailed or written to by a firm you don’t know, offering to invest your pension, don’t do it!  Check them out carefully, call Pension Wise or call the police if you think you are being scammed.  The Regulator should be introducing a nationwide campaign to warn people of such frauds and setting up a hotline to report any suspicious activity.

Pension Wise guidance vital to help people with the new options available – already has thousands of appointments:  The Government’s new, free impartial information and guidance service starts today too.  It is there to help pension savers with their new freedoms.  In the past, most people could not really do much as they were forced into an annuity anyway, but now with more flexibility, it is vital they understand what is going on. So Pension Wise guidance service has a really important part to play in helping people understand what their options might be under the new system.  In particular, the advantages of leaving money in your pension fund and the tax implications of taking money out are two of the most important issues to understand.  Call Pension Wise on 030 0330 1001 to discuss these options and your situation.  It should help and you can have an appointment on the phone, face to face or just use the online information guides.

Seeing a financial adviser is the best option if you can – paying for this can save you money:  Most people would pay a lawyer or an accountant to help them with a complex legal or tax matter.  Pensions are just as important and it will usually be worth considering paying for a specialist expert to advise you on what’s best to do with your pension.  Paying a financial adviser can save you money in future and don’t think that using an on-line information and broking service will mean you don’t pay anything.  If you buy a product, you may well end up paying quite a bit in commission – indeed even more than if you used an adviser, so don’t be put off just by having to pay a fee.  Think carefully about getting the best chance to use your pension wisely.

Much better than the old inflexible system – and much fairer:  The new pension system is much better, especially for people with average sized pension funds, than the previous regime.  Rather than being forced to buy an annuity, which may have paid only a few pounds a week and which normally had no inflation linking and no pension for a partner, you should now be free to take some out and leave the rest invested (which you could not do before) or spend it on repaying debt.  If you have other pensions, you could use one of your funds for important spending, rather than having to give it to an insurer in exchange for just a small weekly sum.  You can use your pension savings to suit your needs, rather than those of the pension providers.

Today is not the day you must do anything – significant benefits of doing nothing with your fund: You may also need help to understand the benefits of doing nothing for now.  Making a proper financial plan can clarify whether you should leave your money invested, spend other funds, rely on other pensions or work for a while longer.  You can help yourself (or work with a financial adviser) to avoid spending your pension money too soon.  The longer you leave it, the more potential for growth.  After all, you’ve saved hard for a pension that can see you through retirement, so you probably need it there for later life.  If you need the money for unexpected spending, or perhaps for health or care needs, once you have spent it, it won’t be there later, but keeping it longer means you can call on it when you really need it.

Triple tax whammy of taking money out of pension fund too soon:  Make sure you understand the tax implications of taking your money out of your pension fund.  By spending your pension money too soon, or taking cash out to use for other investments, you can face a triple tax hit.

1. You lose the tax benefits of keeping the money in a pension (no income tax, no CGT and no inheritance tax).
2. Any money you take out (beyond your 25% tax-free cash) will be taxed as if you had earned that sum during that tax year – if it is a large amount you could lose 45% in tax
3. Any new investment you make will be taxed, such as a buy to let property on which you will have to pay income tax on the rent and capital gains tax on any gains, as well as inheritance tax when you pass away.

So don’t rush into anything.  This is just the first day of the new freedoms – there is plenty of time to make decisions and make sure you do the right thing with your hard-earned savings.

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 18^th 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.

ENDS

12 March 2015

• Why allowing people to unlock annuities makes sense
• Millions forced to buy unwanted annuities would now have an option to cash in if they need to
• Nobody will be forced to sell their annuity back, but they can if they need or want to

The proposals to allow people to cash-in annuities that they were forced to buy under the old pension rules could prove popular for many of those who have unwanted or low value annuities.  Millions of people previously had no choice and had to buy an annuity with their pension savings, even if they didn’t want to.  The old rules, which have now been swept away meant that anyone without a very large pension fund had no other option apart from annuity purchase if they wanted to access their pension.

Who would benefit?

People who purchased an annuity because they had no choice but need the money now to repay debts or pay for health or care needs or other urgent spending.

People who have other pensions and for whom the annuity is not an important source of their retirement income.

People who purchased small annuities, for whom the small amount of ongoing income will make little difference to their standard of living in retirement.  For example, someone with a £5,000 pension fund who bought an annuity at age 60 might have less than £5 a week for life, whereas having a few thousand pounds straight away could make a real difference to their lives.

What are the risks?

There are risks that people will be offered very poor value and charged unfairly high sums to cash-in their annuity.  Of course, they won’t be forced to sell it, it will be their choice and if there are a few companies bidding for their annuity this may help improve the value offered.

There are risks that people will be enticed into selling back their annuity and later regret it.  This risk is the same as exists under the new pension rules, where people do not have to buy an annuity in the first place.  It is not a reason to deny the opportunity to those who were forced to buy an unwanted annuity in the past.

There are risks that people will cash in their annuity, spend all their money and then have to live on state benefits as they become poor in retirement.  This risk is no different to that which exists under the new pension rules and it just helps remove some of the unfairness between the past and the future.

Many of these people have written to me complaining that they didn’t want or need an annuity and would much rather have a cash lump sum to spend as they wish, rather than an income for life that has no inflation protection.

For those people who have annuitised relatively small sums, the amount of income they receive from their annuity will be very small, especially as annuity rates have plummeted in recent years.  Yet, if they wanted to take their tax-free cash, they had to take an annuity with the remainder.

Many people bought unsuitable annuity products or bought an annuity that does not cover their partner and, especially those with large debts to repay or in need of a lump sum for essential expenses, the opportunity to get money back rather than just taking an income will be a welcome option to consider.

Even if these proposals go ahead, nobody will be forced to sell their annuity, it will be up to them.  But the reason this policy is right is that it would give people an option that they have never had before.   Until the Budget pension changes, people who bought an annuity were stuck for life.  If they had bought an annuity they didn’t need or the wrong type of annuity, it was just hard luck, they were stuck.

I have heard from so many people who are furious that they had to buy their annuity in the past couple of years, whereas if they had been younger the new rules would have meant they could have avoided locking all their pension savings into a product they did not want.

Of course there are risks with such an option being offered.  People would be swapping a guaranteed lifetime income for a pot of money today that they could spend.  They will therefore not have that income in future years.  However, they will not be forced to cash in, it is just an option they would have that they have been denied up till now.  The guaranteed income is not normally inflation linked, so its value will erode over time and if people have other pensions elsewhere, they may feel it is more sensible to have some cash instead.

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.

Of course, insurance companies would charge to buy back the annuity income, the cash-in value would be less than original pension and would depend on assessments of health and life expectancy.  However, as nobody is forced to sell their annuity, it is just an option for them, this is not a reason to deny them the chance to change their product.  They should be required or encouraged to take independent financial advice to explain the risks of re-selling and help them find a good rate, but if they still believe this is what is best for them, they would then have the chance to undo their unwanted purchase.

Overall, this is an idea worth pursuing and could help so many people who are currently stuck in an annuity that they never wanted to buy.  It is only an option, and unlike the past rules which forced people to lock their pension savings into a potentially unsuitable or poor value product that did not meet their needs, it gives them the chance to choose what they want to do.  As people will be able to do in the new pension regime.

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.

11 December 2014

• FCA still fails to ensure customers are properly protected despite finding frequent mis-selling
  
• Regulator proposes more consultation and investigation instead of immediate action to protect customers
  
• Annuities irreversible, people still effectively forced to buy, but the most vulnerable being let down
  
• As annuities are insurance against running out of money if you live a very long time in retirement, those in poor health must be protected from wasting their pension funds
  

The FCA has just published findings and recommendations from its long-awaited study of the Retirement Income Market and Annuities.  The findings confirm that customers are still too often being short-changed, yet the recommendations fail to ensure proper protection is put in place straight away.

Having found, in February 2014, that 60% of annuity customers were just buying the product offered by their existing pension company even though 80% of them could get a better rate by switching to another provider, the FCA launched a full-scale study into how retirement income products are sold.  We have waited months for its findings, but the reports out today are deeply disappointing.

Evidence of mis-selling is uncovered but action is not stopping it happening: It is truly shocking that the FCA’s review uncovers what seems clear evidence of frequent mis-selling, yet is not proposing immediate action to stop it happening any more.  For example, even if people were being sent information that disclosed to them that they could shop around for better rates, or explained how annuities worked (and not all of the companies were even clearly doing this) the customers were not being told this information over the phone.  In some cases, call centres were being incentivised to sell their internal annuities with staff earnings linked to the number of annuity customers who did not move away, even though they could be the wrong products at poor rates.  Call centres were not explaining properly about how to benefit from better rates if you had health issues or how much annuity rates can vary if you shop around.  This is surely mis-selling, yet there seem to be no proposals for compensation.

Those in poorest health losing out most and still won’t be properly protected:  The FCA highlights once again, that those with health issues are most at risk of losing out from poor annuity sales practices.  This is a finding it reported back in 2008 (http://www.fsa.gov.uk/pages/Library/Other_publications/Pensions/2008/omo.shtml when it said that pension firms were not telling customers about the advantages of ‘exercising the Open Market Option and in particular not telling people about shopping around if they had health problems’ when they could achieve much higher income from an impaired life or enhanced rate annuity.  Here we are, more than six years later, and similar failings have been uncovered yet again.  But still the FCA is not ensuring that customers in poor health will be properly protected from now on.  Despite the fact that the FCA believes more than half of customers could qualify for better annuity rates as a result of their health (and advisers report that around 60% of their customers are eligible for enhanced rates), the rules regarding selling standard annuities are not being immediately changed.

What has it decided to do now?  Instead of forcing firms to change their sales processes immediately, it has asked them to look back at a sample of their sales since 2008 to check if people with health issues might have been sold the wrong type of annuity.  The FCA says it ‘will be asking some firms to do further work to determine if the findings of this thematic review in relation to the sale of enhanced annuities are indicative of a more widespread problem.’  Based on the figures of low shopping around and low proportion of enhanced annuity purchases, it is blindingly obvious that there is a widespread problem.  Action is required immediately to stop these inappropriate sales happening in future, not just looking at the past.  Indeed, we do not know how long this inquiry by insurers will take, nor how the firms will assess their customers’ health.

Widows still at risk of being left penniless:  Another particular problem that leaves pensioners vulnerable to unsuitable annuity purchases revolve around those who have a partner and those with smallest funds.  Annuity companies are not clearly telling people about the risks of buying a single life annuity.  This means many widows are left penniless when their husband passes away.  The company will send information about ‘joint life’ and ‘single life’ annuities but most people do not understand what these terms mean.  However, the FCA is relying on ‘disclosure’ and paperwork to inform people rather than directly explaining in clear English what the implications of single life annuities are.

What should be done? – Stop this happening to anyone else straight away, second line of defence:   The FCA should impose a duty of care on all companies selling annuities to ensure that customers have a fair chance of doing what is right for their own circumstances.  That means proper risk warnings about the products they may buy and asking basic questions that would reduce the risk of those with shortened life expectancy buying an annuity that assumes they are in excellent health.  For example, before selling an annuity that assumes someone is in excellent health, they should be told this and also asked whether their health is actually good.  For example, the company should explicitly state ‘ this annuity assumes you are in excellent health’.  If you have had any particular health problems it may not be suitable for you.’  The firm should then also ask ‘are you in good health, or have you had cancer, heart problems, high blood pressure, diabetes, been a heavy smoker or had other serious health issues that might impact you in future?’  To protect partners, firms should be forced to say to someone buying a single life product, for example, ‘this annuity assumes you do not want to ensure your partner will carry on receiving income from your pension fund if you die before they do’ and ask the customer to confirm ‘I confirm that I do not want my pension fund to keep on paying a pension to my partner if I die first’.  This would be a proper protection measure.  Why is the FCA being so slow in ensuring proper protection and a second line of defence to protect customers?

Why is it so vital that annuity sales processes are changed immediately?  Annuities are a unique financial product, because once bought they can never be changed.  A standard annuity is for life, if you buy the wrong type of annuity at a poor rate you can’t do anything about it unless you can prove it was mis-sold.  Therefore, it is absolutely crucial that people are protected against unsuitable purchases.  Annuities are also complex – there are many different types and if someone buys the wrong kind, they usually cannot change it.

Didn’t the Budget pension changes mean that people no longer have to buy annuities?:  In theory, yes, the new pension freedoms mean people don’t have to buy an annuity any more, but in practice the pension companies are not allowing their customers to use the new freedoms.  In the past, anyone wanting to take money from their pension fund had to ‘secure an income’ which meant buying an annuity or income drawdown product with the rest of their fund within six months.  Those rules have been relaxed, so people will no longer have to do this, but pension firms have refused to embrace the new freedoms.  Therefore, most people reaching pension age are still being forced to buy an annuity or income drawdown product if they want to take any money out of their fund.  Thus, ensuring annuity sales work properly for customers remains imperative, but the FCA is not showing the required sense of urgency.  It is deeply disappointing that customers can still be left to their own devices, in a market where their pension company effectively forces them to buy a product that may be unsuitable for them and which most people do not understand.

Just ensuring ‘disclosure’ of ‘information’ is not enough to protect customers who don’t understand annuities:  The FCA is still relying on the insurance or pension companies to ‘clearly inform’ their customers about retirement, about their options for taking income from their fund and about getting quotes from other providers.  This does not work.  What is ‘clear information’ to a pension provider or a regulator is simply not understood by most customers who have never heard of annuities and never had to buy one before and may only ever have one chance to buy.  The FCA’s conclusion that it is really important consumers are ‘given sufficient information with which to make an informed decision’ is simply not enough to protect customers.  The terms and jargon used in annuities are baffling to most normal people.  The Regulator and the industry understand these terms, but customers usually don’t.  Therefore, just leaving it to firms to ‘inform’ customers and ‘disclose’ relevant information is not sufficient – a second line of defence is required.

Annuities are an insurance not an investment:  Annuities are basically an insurance product that protects you against running out of money if you live a very long time in retirement.  They are not an investment product.  With interest rates at such low levels, they are much poorer value than ever before and if you are not going to live a very long time, then buying this insurance may not be the best way to spend your pension fund.  In addition, standard annuities offer no inflation protection and, unless you buy the right type of annuity, they will not provide a pension for your partner if you die before they do.  It does not seem as if the FCA has really recognised the urgent need to stop the failings of annuity sales.  Just suggesting that annuities may be ‘good value’ relative to income drawdown ignores the impact of low interest rates, inflation and unsuitable product sales to give a false sense of reassurance to customers who may end up poorly served by a market that has failed its customers for far too long.

1 December 2014

A leading newspaper asked me last week to calculate some estimates of the possible or potential losses suffered by pensioners over the past 10 years as a result of buying unsuitable annuity products.  They wanted an estimate of a potential base for mis-selling claims, following revelations that Aviva has already compensated some customers who were found to have been sold inappropriate annuities.

Over the years, customers reaching their scheme pension age have received an annuity offer with a communication from their pension company, or been sent to a tied annuity company which offered them this product.  The annuity quote provided was for the standard ‘single life, level annuity’.

The calculation is obviously a rough estimate, since we do not know exactly how many people have bought unsuitable annuities over the past 10 years.  I have tried to make assumptions about the numbers of annuities purchased, size of the fund, how many were unwell and how many would have a partner that could have benefited.  Inevitably, this is a rough approximation but it gives a starting point to assess the possible scale of losses and consumer detriment.

I assume the average number of people buying annuities in the past 10 years is 300,000 a year, so this means 3 million people.  All of these people might have been at risk of buying potentially unsuitable annuities, but I have then made assumptions about people receiving advice (which means they are likely to have had the right annuity), people who were healthy, people who had no partner and so on.

METHOD:

Assume 300,000 annuities sold on average each year = 3million people bought single life, level annuity in the past 10 years

Assume 60% of these sales were non-advised and did not have guaranteed annuity rates = 1.8million.  These customers are more likely to have bought an unsuitable product.  Those customers who had advice or guaranteed rates are likely to have less case for compensation.  So I have assumed that 1.8million of the 3million people are at risk of having bought (or been sold) the wrong annuity.

We now need to look at the basis on which an unsuitable sale may have been made and compensation that might be claimed:

1. IMPAIRED LIFE:  Assume 60% of these 1.8million people would have some kind of impaired life = 1.08m who should have had enhanced rate

This is easiest to estimate:  If we assume an average uplift of 20% on their annuity rate and a standard £25,000 average pension fund, the value of their detriment would be 20% of £25,000 = £5,000 each on average

For 1.08m people that amounts to about £5.4billion (1.08m x £5000 = £5.4bn)

2. SINGLE LIFE/JOINT LIFE:  Assume three quarters are married or have a partner = 1.35million of the 1.8 million people

If we assume two thirds of these people have a partner who would have liked a pension to keep on paying if their husband died sooner, this means 900,000 people may have bought the wrong product – should have bought a joint-life annuity, not single life.

We then have to assume how many of these people will die before their partner and, as most purchasers are men, this is likely to be a relatively high proportion – let’s say two thirds.  That is 600,000 widows/widowers who will not get a pension from their partner who passes away before they do.

If we assume that these widows/widowers on average live 5 years longer than their partners, they are losing out on 5 years of income.

If we assume that they could have had an average income of an extra £900 a year for those 5 years, that means 600,000 widows or widowers lost out on £540m a year, which is £2.7billion over 5 years.  So the ‘mis-selling’ of single life rather than joint life annuities may have resulted in a loss of £2.7billion in pensioner income over the last ten years.

(PLEASE NOTE: To do this properly one would need to estimate the extra income that the household originally received from a single life annuity, but this is more difficult since some of those affected may have had or been entitled to enhanced rates, so the mis-selling could apply on that basis too.  I have therefore assumed the relative positives and negatives from this source cancel out).

3. TRIVIAL COMMUTATION: Assume 5% could have trivially commuted = 90,000 out of the 1.8million

If we assume 5% of those who bought an annuity could have taken the cash instead, then that means 90,000 people may have been able to trivially commute and bought an annuity unnecessarily.

If we assume the average size of the pension that could have been commuted was £5000 then that means £450million of annuity purchases may have been unsuitable (90,000 people x £5,000 pension = £450million)

Conclusion:

Therefore the total potential amount of mis-sold annuities over the past ten years is estimated to be around £8.5billion.

ENDS

30 September 2014

So many people have been asking me about the new pension changes and what they might mean, I have put together a quick Q&A to address some of these with my comments.  Hope you find it of interest.  There are profound implications for pension products and pension savers – as well as for regulators of course, to make sure people understand what this all means for them.

• If in good health, perhaps you shouldn’t buy an annuity before age 75
• Look for an annuity with guarantees or value protection
• Pensions have become the most attractive form of savings
• This benefits ordinary savers, not just the wealthy
• More money will go into pensions
• ISAs may switch to pensions
• More money will stay in pensions
• Auto-enrolment more attractive than before
• Pensions can pass down the generations
• Guidance must explain the tax benefits and signpost to advice
• FCA must ensure customers are properly protected

The latest announcement of tax free inheritance for pensions, on top of the Budget reforms already announced, will have profound implications for the future of UK private pensions.  It is not putting it too strongly to say that there is a totally different outlook for pension savers in future.  This has implications for millions of us, young or older, and it is vital that the new environment is properly explained and understood.  So much change has happened which runs entirely contrary to decades of traditional UK pensions thinking that many will find it hard to get their head around the new landscape.  Here is quick Q&A to start the ball rolling and hopefully help you appreciate what this might mean going forward.

1.        Will these reforms make pensions more attractive?

Unquestionably yes.  Pensions are the most tax-favoured and attractive long-term savings vehicle for almost all of us.  You could say pensions have become sexy – even exciting!  With the new freedom and flexibility, you can save in a pension fund, get tax relief at your top marginal rate, all gains you make are tax free and then any money you don’t use from your fund while you are alive will go tax-free to the next generation.  Even your own home suffers inheritance tax, but your pension passes on tax free.

2.       Do the reforms just benefit the wealthy?

Absolutely not.  In fact, that’s part of the beauty of the new landscape.  Pensions are now good for the average earners who can enjoy the kind of freedom and flexibility that used to only apply to the very wealthiest.  If you had huge sums in a pension fund before, you did not need to buy an annuity or be limited by capped drawdown, you could use flexible drawdown to take money whenever you wanted, and you could afford not to touch the fund before age 75 so it would pass on tax free to the next generation.  Those who had smaller amounts were denied these freedoms but in future they will be available to all.  Whether your pension fund is large or small, the Government will not restrict what you can do once you reach age 55 and everyone under 75 can pass on the funds totally free of tax, while everyone over 75 can pass on unused funds to give pensions for the next generation – which will be tax free until they are drawn down and face marginal income tax rates.  This ensures many of the advantages that the wealthiest had can now be enjoyed by every pension saver (assuming their pension company allows them to!)

3.        Does this have implications for auto-enrolment?

Yes, huge implications.  The reforms are likely to mean many more people will stay auto-enrolled and opt out rates should be dramatically lower than previously expected.  It also means we should think about auto-enrolling those earning under £10,000 as well, because they are most likely to need the extra savings. As pensions are now so much more flexible and suitable for savers, with the best tax advantages, the reforms make auto-enrolment a ‘must-have’ for many more workers.  This is likely to mean higher costs to both employers and the Exchequer than previously forecast.  Auto-enrolment is a ‘buy one get one free’ offer.  Each £1 the worker contributes immediately doubles to £2 in their pension – due to the employer contribution and tax relief. This is far more powerful than even higher rate tax relief.

4.        What does this mean for annuities?

There are several implications for annuities of the new pension landscape.

·         More annuities with guarantees, so money can pass on tax free on early death

·         More annuities with value protection, as previous sales were hampered by the 55% death tax

·         People who are in good health should perhaps delay annuity purchase to age 75

·         Standard annuity sales will fall sharply – more impaired or underwritten annuities.

Annuity sales should fall sharply, many will be better to wait till age 75 and the providers will need to offer more guarantees or value protection.  Clearly, the reforms will mean the sale of standard annuities, that has dominated the Defined Contribution pensions market for many years, should decline sharply.  This is long overdue.  Annuities have been sold to people who should never have bought them, or who bought the wrong type of product and the Regulator failed to protect customers properly.  The tax system now favours income drawdown and, because of the tax advantages of inheriting pension funds if the saver dies before age 75, there will be a real incentive to delay annuitising until later ages.

5.        Won’t people just rush out and spend all the money as soon as they can get their hands on it?

Of course, there is that risk, but firstly I trust people who have been responsible enough to save for their retirement to be responsible enough to manage their funds in later life too.  Secondly, with the latest announcement of the scrapping of the 55% inherited pensions tax, there is a real incentive now for people to leave their money inside their pension fund for as long as possible.  While any funds passed on were taxed at the penal 55% rate, there was a penalty on keeping money in pensions.  Now, in contrast, there is a real reason to hang onto your pension money as long as you can.  It grows tax free while in the pension, it’s there if you need it, but if you don’t spend it can pass on tax free.

6.        Are there implications for care funding?

Yes, there is now a much more realistic chance that pension funds can help pay for later life care needs, for which no funding has been put in place and which many more people will require.  There is a looming crisis in the funding of elderly care, with neither the state, nor the private sector having prepared for this adequately.  These pension reforms could kick-start care funding by encouraging people to leave money in their pension funds and then, if they need care, they have the money to pay for it.  The state will not pay and cannot pay for all.

7.        Does this have implications for ISAs?

Actually yes.  The fact that pensions have become so much more tax favoured now suggests many people could benefit from switching ISAs into pensions.  The ISA is not free of inheritance tax, it does not get tax relief up front, there is normally no employer contribution and the freedom to spend ISAs has now been at least partially extended to pensions.

8.       Will this benefit families?

Yes, this new pensions landscape means people can pass their pensions onto their loved ones and pension savers will know that their hard earned savings can benefit the next generation if they don’t need or use that money themselves.  The Government is providing real incentives for people to help their children and grandchildren and improve inter generational wealth sharing.  The old system would see insurance companies pocketing the unused funds of most pension savers.  Now their families can benefit instead.

9.  What does this mean for products?

We will need new types of product – annuities sold from a later age and with more guarantees, so they can be passed on to loved ones.  Different products for accumulating pensions, rather than current lifestyle funds that just assume savers will buy an annuity at a preset age.  The default will be drawdown, or keeping money invested in the pension fund, rather than buying an annuity so providers need to help savers with better returns for longer periods of time.

10.  What about the implications for guidance and regulation?

The new landscape makes guidance even more important than ever.  Explaining the tax implications of the pension saving, the implications of taking money out too soon, the tax benefits on death, the benefits of doing nothing and of leaving money invested if still working will all need to be understood.  The guidance should signpost people to full advice too.  In addition, the Regulator must make sure that customers are properly protected.  These reforms are great, but only if people can take advantage of them.  Providers must not be allowed to mislead customers into buying unsuitable products, as has too often been the case in the past.