The government confirmed yesterday that it will launch a consultation on Wednesday, the day of the Budget, on the measures that are needed to establish a market to sell and buy annuities.
The policy has received a mixed reaction, with most experts accepting some individuals may find the freedom to sell on an existing annuity beneficial, but concerned that the risks to providers and frictional costs of transacting sales mean consumers are unlikely to get attractive returns in many cases.
From April 2016, the government says it will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract, provided the incoming administration proceeds with the plan.
Pensioners will be able to either take it as a lump sum, or place it into drawdown to use the proceeds more gradually, in both cases subject to income tax.
Chancellor of the Exchequer George Osborne said: “There are 5 million pensioners who are locked into annuities they have already bought. They should have the same freedoms as we have given everyone else. For most people, sticking with that annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose – the same freedom we are offering those approaching retirement in April this year.
“So I am going to change the law to let that happen, and make sure we have the right guidance in place.
People who’ve worked hard and saved hard all their lives should be trusted with their own pension.”
Some experts believe the market could highlight poor deals that individuals have got in the past, particularly where people have rolled over into products that do not match their personal profile.
Retirement Intelligence director Billy Burrows says: “In most walks of life it is not necessarily the seller who gets the best deal. People will effectively be selling as a distressed sale, and there will be frictional costs such as the cost of getting a medical, which will be needed in all cases. If you are tying your money up for £20 years, you are only going to do so if you are going to get a decent return. Offers could be 20 per cent below fair value.
“The other risks are that you get people trading in joint life annuities without informing the other party and also that we will see people bombarded by operators saying ‘I can get you cash for your annuity’.”
Jelf Employee Benefits head of benefits strategy Steve Herbert says: “This action goes some way to remove a bias towards pre-retirees created by last year’s surprise Pensions Freedoms budget announcement. So what’s not to like?
“Firstly is the perception that this will always be a good deal. The Chancellor will be removing some tax from the equation, but reports suggest that marginal rates will still apply – and that could still make a substantial dent in the lump sum payment – one that might well have been entirely avoided with regular annuity income.
“By the same token, the rhetoric conveniently passes over an important consideration; the organisations that are prepared to exchange a lump sum for an annuity income are not required to do so by the Government. They will only be prepared to make this exchange if they think that it is a good commercial decision. Or to put it another way, the value of the exchange is unlikely to favour the pensioner.
“It follows that pensioners who have had little option but to lock into relatively poor rates in recent years, now have the opportunity to compound that problem by swapping that income for a lump sum payment which may not favour them financially. This could make a bad situation worse for many.”