Osborne’s second hand annuity plan will create more problems than it will solve says Teresa Hunter
As if advisers didn’t already have enough to contend with as the April deadline for the new pension freedoms approaches, Chancellor George Osborne has decided annuities too should be liberated, via the creation of a second-hand market in the contracts.
It is almost impossible, from where we stand today, to know whether this second-hand market will ever become a reality: if it does, who will run the thing? And will there be any appetite from the public?
We are told, that retirees and those approaching retirement, will do anything to get their savings out of pensions and into cash. If so we are looking at a car crash in the making.
Osborne describes such views as patronising nonsense, and savers should be trusted to look after their own money.
It’s not clear Labour agrees with him. So if it forms the next Government, it is by no means certain the consultation paper will proceed to its intended conclusion.
Even if it does, it can’t happen until 2016. So, how the public reacts to the first unlocking of pensions cash, should be a good indication of what will happen if annuities are also released.
I think it will be fascinating to watch how consumers behave if left to their own devices. Trying to second-guess the human psyche is a mug’s game.
But, of course, they won’t be left on their own. Where there is a crumb to be gobbled, the rats will circle. More certain is the establishment of a whole industry informing individuals they have been ripped off by their annuity provider, and should rush now to get their money back.
Get their money back. Now that is a laugh. Right now we don’t know the technical details of the basis on which these contracts would be priced, nor indeed the reality of the charges that might be imposed. While the tax charge will be lower than the current 55 per cent, it will still be at an individual’s marginal rate.
Even so, there may be individuals for whom cashing in an annuity could make sense. They may, for example, have excessive income from a company pension, and a couple of very small private contracts.
If they are simultaneously extremely short of capital and fancy some good holidays, or helping the children out with education or housing bills, then cashing in some small extraneous policies may not be unappealing.
More likely, sadly, those already living in reduced states in retirement, will be attracted by the prospect of getting their hands on some fast cash, almost irrespective of the cost – which could be considerable.
Number crunchers at actuaries Hymans Robertson estimate, for example, that retirees who invested £50,000 in a pension five years ago, at 65, will probably have secured an annual pension in the region of £3,600, based on bond yields at that time. Today that same income stream, might cost about £58,900. So having already received £18,000 in income, they might be able to trade the contract for more than it was originally worth.
That is the golden scenario and an easy sale to the gullible. However, after charges and tax, a slice it is quite difficult to calculate at the moment, the individual may only end up with say £41,410 in their pockets.
Furthermore, if the policyholder lives beyond 86, they would ultimately receive more from the annuity than the £58,000 cash payout, albeit the value of that money be eroded by 16 years of inflation.
Now, Government will insist anyone contemplating cashing in an annuity takes full independent advice. This may be over the top for very small contracts – costly luxury.
And I can hardly see quality advisers queueing up for the business, unless it is too lucrative to turn away.
What a thankless task. You sold someone a perfectly good annuity a few years ago and back they come to throw it in. Having advised them in the first place that this would be good for them, what is your next move?
If you recommend selling it, then what of your earlier advice? If you stick to your guns and tell them that selling could be a mistake, because of the poor value they will receive, will they listen?
Constantly moving the goal posts has made a mockery of the whole concept of sound financial advice and prudent planning.