Proposals to allow pensioners to cash in annuities

Pensioners would be able to surrender annuities for a cash lump sum under proposals announced by Steve Webb, Pensions Minister, affecting potentially up to 5 million pensioners in the UK and around £11bn annual pension income.

This would mark a further reform to the pensions freedoms already planned for April 2015, which will enable pensions to be drawn as a lump sum rather than being forced to buy an annuity (a guaranteed income for life).

Steve Webb commented that he wanted to see people trusted with their own money wherever possible: ‘I want to see if we can get these freedoms extended to those who are receiving an annuity but who might prefer a cash lump sum. No one would be obliged to do so, but for those who would prefer up-front capital to regular income, I can see no reason at all why this should not be an option.’

The proposals are to be subject to a public consultation before the general election in May with a view to obtaining cross-party support for implementation after the election.

The plans would most likely see insurance companies purchase the contracts from policy holders, with payouts made until the original owner died. However, Fidelity Worldwide Investment retirement director Alan Higham pointed out the move would only suit people who already had the most to gain from annuities.

He said: “The aims are undoubtedly noble. However, it would be very difficult to create an orderly market to allow annuities to be bought and sold.

“In many cases the annuity is worthless or worth significantly less on death. You would only pay good money if you knew for sure that the person has good health. “Thus only those in good health, prepared to go to a doctor for an examination to prove the fact will be able to sell such policies. In other words, only the healthy, who stand to benefit the most from owning an annuity, will have a chance of selling one.”

Barnett Waddingham senior consultant Malcolm McLean said the success of the proposal would hang on whether or not pension funds and insurers had any appetite for these guaranteed income streams. He added: “Protections will probably be needed to prevent pensioners – especially the very elderly – being ripped off if they choose to trade their annuities for cash.”

The Treasury would also have to decide how these cash sales of pensions were taxed, and the risks of the person falling back on means-tested support would need to be considered.

McLean said: “I have got a feeling that for a new government possibly of a different political persuasion this all may be a ‘bridge too far’ and may get shelved until such a time as experience of the start of the Budget changes in April is fully and properly evaluated.”

The Institute and Faculty of Actuaries (IFoA) president Nick Salter said that the proposals continued the government’s move to give people greater control of their retirement savings. But he warned: “Allowing existing pensioners to surrender their annuities will not be straightforward – for consumers or annuity providers.

“In the midst of a large number of pension reforms, this further change would reinforce the need for individuals to have good guidance and, where required, good independent advice.”

[This article is for information only and does not constitute advice. If you would like advice, please get in touch on 01392 875500 or info@SeabrookClark.co.uk]

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