Retirees on benefits who sell their annuity need to fully understand the DWP will treat them as if they continue to receive the income from it warns former pensions minister Steve Webb.
Webb, who has recently started in his role as director of policy at Royal London, has responded to the government’s decision not to exclude those on means-tested benefits from the secondary annuity market with a warning that vulnerable older annuitants will need strong consumer protection if poor outcomes are to be avoided.
The original Treasury consultation paper on the secondary annuity market floated the idea of excluding those on means-tested benefits from selling on their annuities. But the government’s consultation response, published today, says there will be no exclusion of benefits claimants or those eligible for social care funding from the state. It will instead focus on ensuring that individuals understand how selling an annuity will be treated under the government’s deliberate deprivation rules.
The Treasury’s consultation response says: “It would not be appropriate for annuity income to be automatically replaced by benefit income or additional support for care costs. Existing legislation provides that a household may be treated as possessing income or capital they no longer have if they have been found to have deliberately deprived themselves of that income or capital in order to gain additional support or benefits. Ensuring that people understand these rules and the implications for current or future means- tested benefits and social care support will be a key aspect of the consumer protection regime.”
Royal London director of policy Steve Webb says: “Consumer protection will be essential in this new market and we remain concerned that people on means-tested benefits will be allowed to raise capital by selling an income stream. There is a real risk of poor outcomes if people on low incomes sell their annuity only to discover that the DWP treats them as if they were still drawing that income. If the government thinks that most people would do best to retain their annuity income, it is especially important that the most vulnerable customers, including the ‘old elderly’, are given particular protection. These issues will need to be covered in the future FCA consultation.”
Barnett Waddingham senior consultant Malcolm McLean says: “Whereas many annuitants will welcome the opportunity to exchange core value annuities for cash, the government clearly shares the view of many advisers that for the ‘vast majority of customers, selling annuity will not be the best decision’.
“This must be reinforced in all messages that are sent out direct to consumers over the next 12 months.
“There are also some very significant operational details which have yet to be finalised and could materially affect the value of any sale for the individual. These include the level at which financial advice has to be obtained (and paid for) and exactly how the impact on means tested benefits will be measured. In this latter context the government is to consider whether it is ‘possible and appropriate to amend the existing deprivation rules to provide greater protection for public expenditure.’”