In his recent budget the chancellor confirmed plans to make it easier for pensioners who have already bought an annuity to cash it in
– exchanging a guaranteed income for life for a cash lump sum they can
spend or invest as they wish. The move follows pension freedoms for new
pensioners which come into force on 6 April. So is it a good idea?
Of the first set of reforms, Mark Hayward, of the National Association of Estate Agents, was quoted as saying: “There are no doubts we will see a feeding frenzy … We still have an undersupply of housing and this movement is likely to fuel further house price inflation.”
Those concerns will be multiplied many times over should the chancellor’s latest proposals come to fruition.
The first barriers will be technical. Already the pensions industry is reeling from the challenge of delivering the reforms announced in the last budget, and many think that the year long timetable for the introduction of the latest pension “freedom” is seriously optimistic.
But even if a market in annuities can be created, why should it be permitted? For one thing, vast numbers of pension savers have benefited from tax relief on the basis that they buy a lifetime income. This trade-off almost guaranteed private savers would avoid falling back on the state.
For some pension savers that meant a 20% boost to their annual pot while they were working and paying into their scheme. For others, the taxpayer agreed to forgo 40% tax. Make no mistake about how generous these reliefs are. They cost the taxpayer around £34.5bn a year.
Neil Lovatt, director at a financial mutual, Scottish Friendly, reckons anyone who thinks they will get a good deal by cashing in an existing annuity is “living in cloud cuckoo land”. But he makes another crucial point about tax. “Allowing annuitants to break the contracts means breaking the ‘generational agreement’ that has shaped the pension industry for years. Namely, that it’s the taxpayer that has paid into the very pension pots which will now be cashed in.
“For a pension pot that’s built up over 30 years, it is estimated that around 32% of the money in it will have been generated through tax relief funded by the taxpayer; for higher rate taxpayers the amount funded by taxpayers could be as high as 50%.
To a politician concerned with tactical advantage, this will be a sensible move. Osborne’s pension reforms will produce a flood of spending today, not tomorrow, meaning that tax revenues will be boosted in the short term. But he is trading on the financial ignorance of most savers, who at best may pay more tax and end up poorer in later life, and at worst fall prey to all manner of tricksters and fraudsters promising double digit returns on plausible but fictitious investments.
Of course the dynamics of old age have changed and so have financial markets. Many people retire and can expect to live another 30 years, not five, which together with the collapse in interest rates and bond yields have sent annuity rates to rock bottom levels.
But the answer is a reform of retirement provision and long term care, not pandering to a minority who want to play with their pension pots, probably in the mistaken belief they know what they are doing.
If anything, the wealth of many older pensioners should attract extra taxes, to be funnelled back to the young in the form of more generous family benefits, better funded apprenticeships and lower university costs. The economy is already skewed towards the old. Thoughts of reform should focus on the young.
Until now, most people were forced to lock their pension fund into an annuity, with no chance to change it. Offering the option to change their mind seems only fair. They will not be forced to, it will be their choice, but it is a choice they are currently denied.
Unfortunately, past annuity sales lacked adequate customer protection and many savers paid hefty charges for their original annuity or lost out with poor rates. Of course there is now a risk they will face further costs when selling it on. This is not a reason to deny them the opportunity, but it does mean strict regulatory oversight is vital, with transparency of pricing and possibly controls on charges. Good information, guidance and preferably expert individual advice will be important. The government service Pension Wise can help, but independent financial advice would be better, to explain the tax implications and risks.
Allowing people to sell their unwanted annuities at last offers a chance to remedy some of the past mis-selling or mis-buying. Some will take a cash lump sum that better meets their needs than a level income stream, and some will reinvest in a pension drawdown fund and withdraw money later.
I expect most people will not sell their annuity, but there are numerous circumstances in which they might consider this. For example, some people had very small pension funds, on top of other pensions, but were forced to annuitise. A £10,000 pension fund could buy less than £10 a week pension, with no inflation or partner protection. This is hardly a life-changing sum, whereas having a few thousand pounds to spend or invest as they wish, perhaps clearing debts, paying for urgent health needs, or investing for the future, could be more useful, especially with other pensions providing ongoing income.
The majority of existing annuities were sold on a “single-life” basis, leaving many widows or widowers without provision. Those who unwittingly bought such products would have a chance to retrieve some of their money to ensure support for their partner.
This could also affect people with guaranteed annuity rates much higher than current market rates. This attractive income stream was usually only available as a single-life product. Selling this on could allow provision for the partner too.
Of course there are risks that selling annuities could compound the damage to people’s pension prospects from the original annuity purchase. However, it can also help mitigate the hitherto irreversible poor customer outcomes of the past.
This is rather like giving people the opportunity to change their insurance policy. Standard annuities offer a particular type of insurance for retirement – insurance against the individual purchaser living a very long time and against future interest rate falls. But forcing people to lock their entire pension fund into this insurance leaves customers exposed to other retirement risks, such as inflation, poor health or early death.
Selling an annuity is a logical extension to the new pension freedoms and carries similar risks. On balance, I believe it is right to give purchasers who were forced into annuities the chance to change them. They will not have to sell, but offering them the option to do so will help level the playing field between past and future pension savers.
No, says Phillip Inman
When George Osborne told the 400,000 people who retire every year with an annuity that they could now do whatever they liked with the money, it immediately sparked concerns about a renewed buy-to-let boom. Letting the 5 million people with existing annuities also cash out could turn that boom into a frenzy.Of the first set of reforms, Mark Hayward, of the National Association of Estate Agents, was quoted as saying: “There are no doubts we will see a feeding frenzy … We still have an undersupply of housing and this movement is likely to fuel further house price inflation.”
Those concerns will be multiplied many times over should the chancellor’s latest proposals come to fruition.
The first barriers will be technical. Already the pensions industry is reeling from the challenge of delivering the reforms announced in the last budget, and many think that the year long timetable for the introduction of the latest pension “freedom” is seriously optimistic.
But even if a market in annuities can be created, why should it be permitted? For one thing, vast numbers of pension savers have benefited from tax relief on the basis that they buy a lifetime income. This trade-off almost guaranteed private savers would avoid falling back on the state.
For some pension savers that meant a 20% boost to their annual pot while they were working and paying into their scheme. For others, the taxpayer agreed to forgo 40% tax. Make no mistake about how generous these reliefs are. They cost the taxpayer around £34.5bn a year.
Neil Lovatt, director at a financial mutual, Scottish Friendly, reckons anyone who thinks they will get a good deal by cashing in an existing annuity is “living in cloud cuckoo land”. But he makes another crucial point about tax. “Allowing annuitants to break the contracts means breaking the ‘generational agreement’ that has shaped the pension industry for years. Namely, that it’s the taxpayer that has paid into the very pension pots which will now be cashed in.
“For a pension pot that’s built up over 30 years, it is estimated that around 32% of the money in it will have been generated through tax relief funded by the taxpayer; for higher rate taxpayers the amount funded by taxpayers could be as high as 50%.
To a politician concerned with tactical advantage, this will be a sensible move. Osborne’s pension reforms will produce a flood of spending today, not tomorrow, meaning that tax revenues will be boosted in the short term. But he is trading on the financial ignorance of most savers, who at best may pay more tax and end up poorer in later life, and at worst fall prey to all manner of tricksters and fraudsters promising double digit returns on plausible but fictitious investments.
Of course the dynamics of old age have changed and so have financial markets. Many people retire and can expect to live another 30 years, not five, which together with the collapse in interest rates and bond yields have sent annuity rates to rock bottom levels.
But the answer is a reform of retirement provision and long term care, not pandering to a minority who want to play with their pension pots, probably in the mistaken belief they know what they are doing.
If anything, the wealth of many older pensioners should attract extra taxes, to be funnelled back to the young in the form of more generous family benefits, better funded apprenticeships and lower university costs. The economy is already skewed towards the old. Thoughts of reform should focus on the young.
Until now, most people were forced to lock their pension fund into an annuity, with no chance to change it. Offering the option to change their mind seems only fair. They will not be forced to, it will be their choice, but it is a choice they are currently denied.
Unfortunately, past annuity sales lacked adequate customer protection and many savers paid hefty charges for their original annuity or lost out with poor rates. Of course there is now a risk they will face further costs when selling it on. This is not a reason to deny them the opportunity, but it does mean strict regulatory oversight is vital, with transparency of pricing and possibly controls on charges. Good information, guidance and preferably expert individual advice will be important. The government service Pension Wise can help, but independent financial advice would be better, to explain the tax implications and risks.
Allowing people to sell their unwanted annuities at last offers a chance to remedy some of the past mis-selling or mis-buying. Some will take a cash lump sum that better meets their needs than a level income stream, and some will reinvest in a pension drawdown fund and withdraw money later.
I expect most people will not sell their annuity, but there are numerous circumstances in which they might consider this. For example, some people had very small pension funds, on top of other pensions, but were forced to annuitise. A £10,000 pension fund could buy less than £10 a week pension, with no inflation or partner protection. This is hardly a life-changing sum, whereas having a few thousand pounds to spend or invest as they wish, perhaps clearing debts, paying for urgent health needs, or investing for the future, could be more useful, especially with other pensions providing ongoing income.
The majority of existing annuities were sold on a “single-life” basis, leaving many widows or widowers without provision. Those who unwittingly bought such products would have a chance to retrieve some of their money to ensure support for their partner.
This could also affect people with guaranteed annuity rates much higher than current market rates. This attractive income stream was usually only available as a single-life product. Selling this on could allow provision for the partner too.
Of course there are risks that selling annuities could compound the damage to people’s pension prospects from the original annuity purchase. However, it can also help mitigate the hitherto irreversible poor customer outcomes of the past.
This is rather like giving people the opportunity to change their insurance policy. Standard annuities offer a particular type of insurance for retirement – insurance against the individual purchaser living a very long time and against future interest rate falls. But forcing people to lock their entire pension fund into this insurance leaves customers exposed to other retirement risks, such as inflation, poor health or early death.
Selling an annuity is a logical extension to the new pension freedoms and carries similar risks. On balance, I believe it is right to give purchasers who were forced into annuities the chance to change them. They will not have to sell, but offering them the option to do so will help level the playing field between past and future pension savers.
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