Is the idea of allowing pensioners to cash-in their annuities a top-notch idea or a looming catastrophe?
WHAT IS HAPPENING?
In this year’s Budget, George Osborne confirmed that pensioners who had already bought an annuity would be able to cash-in the product by selling it on, without unwinding the policy.
Like other aspects of the recent pension changes, the idea was not the chancellor’s but belonged to the pensions minister Steve Webb. The Department for Work and Pensions was commissioned to work on the proposals with the initial aim of achieving cross-party consensus for the plans to be introduced after the election in May.
The idea gathered pace and by March was under serious consideration by senior politicians, culminating in Osborne’s Budget announcement.
HOW WILL IT WORK?
Creating a secondary annuity market would enable an annuity holder to sell their pension income for cash.
At the moment, the primary barrier to that process is an ‘unauthorised payment’ tax charge, which deters annuity holders from assigning their annuity payment to another party. The government aims to remove this.
The most recent government figures on annuities from 2013 suggest there are roughly six million annuities in payment, paying out around £13.3 billion a year. With some people holding more than one annuity, it estimates that up to five million people are in receipt of payments.
Under the proposed new rules, those people would have three options. They could:
• take a lump sum cash payment subject to income tax at their marginal rate;
• put the money into a flexi-access drawdown fund provided by the third-party buyer or an alternative provider. That transfer would not be subject to income tax, nor eligible for tax relief or count towards the annual or lifetime allowance;
• use the proceeds of sale to purchase a flexible annuity provided by the third-party buyer or an alternative provider.
IS THERE DEMAND FOR SECOND-HAND ANNUITIES?
It is all very well offering pensioners the chance to sell their annuities, but will anyone want to buy them?
The government has proposed that there will not be a retail market for second-hand annuities, but a restricted market open only to pension providers and institutional vehicles, such as defined benefit (DB) pension schemes.
There are questions about how attractive annuities will be as an investment for these providers. Schemes are unlikely to buy single annuities, and there would be administrative costs involved in packaging up a number of policies.
There is still a question mark about how sizeable the market will be and whether it will ever grow.
An important point to understand is that under the government consultation, a pensioner’s original annuity provider would have the right to block a sale. The original annuity writer has to give consent, and the consultation proposed gives quite a lot of responsibility to that insurance company, including risk warnings and valuations. The insurer will be faced with a lot of work and quite a lot of risk. It can be hard to see what is in it for them.