Pension blow for millions stuck in poor-value annuities

The government has decided people won’t be able to sell their annuity after-all, but it’s not bad news for everyone

Updated: 
Margaret Thatcher Lecture 2016

The government has changed its mind about annuities - delivering a terrible blow for millions of pensioners who are desperate to escape from poor-value annuities they bought before pension freedoms were introduced.

The original plan

Under George Osborne, the Treasury announced a plan to open up a 'secondary market ' for annuities. This means that anyone who is unhappy with their annuity would be able to sell it in return for a lump sum. This sum would then be subject to pension freedoms - so they could either buy a better value annuity, spend the lump sum as they went along or do a bit of both.

This offered a real lifeline to people who hadn't realised they could shop around for annuity, so had opted for one offering terrible value. It also meant hope for people who should have bought an enhanced annuity because of their health, but had not known the option was open to them.

The government was just consulting on the details, but they had every hope that in six month's time, they would be free of an annuity they had long been unhappy with.

Now the government has announced that it's scrapping the proposals.

Why?

There were a few reasons for this. During consultation, it emerged that people were going to have to pay huge fees in order to sell their annuity - of up to 20%. There was a real risk that people who didn't take advice would sell their annuity, and end up in financial difficulties as a result.

There was also the risk of fraud - and that scams could be targeted at pensioners who could be persuaded to exchange their annuity for a lump sum.

There was an additional concern that many people have perfectly good annuities - offering some of the best deals on the market: it's just that they don't fully understand the value of them. Quite understandably, people don't understand how long their life expectancy is - and therefore what their pension payments will eventually add up to. If they are underestimating longevity, then they may swap a perfectly decent annuity for an insufficient lump sum.

Then there's the worry that vulnerable investors in challenging circumstances due to financial pressures or low financial capability are at particular risk in the secondary annuity market. Tom McPhail, head of retirement policy at Hargreaves Lansdown, says this was one of the many reasons his company had already decided not to participate in the market.

Is this a good move?

Overall, many in the industry are relieved to see it go - describing it as 'a mis-selling scandal in the making'. Douglas Anderson, Partner at Hymans Robertson said: "This is good news for consumers. While some retirees may feel a sense of disappointment as they feel trapped in a product they didn't want to buy, in reality, getting value for money from cashing in annuities would have been a tall order. With freedom to sell came the risk of making poor decisions. There simply would not have been enough protection in place for consumers come April."

Rutherford Wilkinson, technical director, Mike Gordon says: "I always thought that this was an accident waiting to happen, and it is best for the plans to be scrapped. The only surprise is that it has taken them so long to realise that the practical difficulties outweigh the potential advantages. Hopefully the Government will learn that it might be better to think about the practicalities before they announce such policies to the public, and distract people for 18 months."

Disappointment

The risks for these groups of people were deemed to be more important than the possible benefits for those who have bought the wrong annuity. However, those who will miss out on their chance to sell their annuity have had their hopes dashed.

As Ros Altmann, former pensions minister, says: "This is going to be really disappointing for all those people who have desperately wanted to get rid of annuities which they were forced to buy and which were often not sold properly to them in the first place. Now these savers will be stuck with these deals for life. The Government got their hopes up and many people will be very upset."

For those who are considering buying an annuity, it's a timely reminder of the importance of getting the right deal for your needs. This, at the very least, means shopping around, and in many cases, it's well worth taking financial advice to establish the best strategy for generating income in retirement.

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