Pension minister Steve Webb’s plan to allow annuity-holders to sell their contracts for cash has been attacked as unworkable, complex and prohibitively expensive.
Webb floated the idea of reselling existing annuities in an interview in the Telegraph on Saturday, suggesting the same freedoms that will be available to those retiring from next April could be extended to those who have already bought annuities.
But Hargreaves Lansdown says the idea is unworkable in practice as finding a ‘fair’ price would be expensive and could lead to selection against insurers. Barnett Waddingham described the proposal as ‘a bridge too far’.
Hargreaves says there are two possible models for releasing annuity-holders from their contacts. The first would involve the sponsoring insurer cancelling the annuity contract for an agreed fee. This would require medical underwriting, as those in poor health would be more likely to want to cash out, putting pressure on the insurers solvency.
A second model would be the sale of the annuity income stream to a third party, as happens in the US with traded life policies.
Webb told The Telegraph: “I want to see people trusted with their own money wherever possible. I have already heard from people around the country who would like to see this change made. 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 why this should not be an option.”
Hargreaves head of pensions policy Tom McPhail says: “We just don’t think this latest idea will ever work. The concept of traded annuities was popular in America but never took off in the UK. The few schemes which were launched failed to get off the ground. The FSA labelled such schemes as ‘high-risk, toxic products’.
“It is also worth noting that most market participants who have the necessary skills to engage in such transactions are the same insurers, actuaries and pension companies who are all currently working flat out to deal with all the other pension changes the government has thrown at them in recent months.”
Barnett Waddingham senior consultant, Malcolm McLean says: “The devil will be in the detail and whether, as Mr Webb envisages, sufficient pension funds and insurance companies will be interested in acquiring guaranteed income streams that are linked to people’s lifespans and are prepared to pay an acceptable premium for the purpose.
“Protections will probably be needed to prevent pensioners – especially the very elderly – being ripped-off if they choose to trade in their annuities for cash. For many the cash option may well not represent good value for money although for others with, for example, a standard rate annuity but developing health problems and shortened life expectancy the opposite may be true.
“The Treasury will have to decide how cash sales of pensions are to be taxed as well as presumably having to be satisfied as to the risks of substantial numbers who opt to exchange their annuities for cash finding themselves subsequently having to fall back on means-tested support from the Government – bearing in mind they will not have the underpinning benefit of the new single-tier state pension.
“The reforms will require legislative changes which will not be able to be implemented in the new parliament. Whether they will go ahead exactly as Mr Webb proposes must be uncertain at this point in time. 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.”
Old Mutual Wealth’s Adrian Walker says: “For individuals already receiving retirement income via an annuity it sounds reasonable to try to provide more flexible access to their cash. However there are a number of factors which will make this an appropriate option for very few people and we would expect this to be a very small market.
“This will be a market where the buyers will have all the knowledge and the sellers none. This makes it appealing to buyers and it is unlikely that sellers in normal circumstances will get a good deal. However a good deal is in the eye of the beholder. If someone is riddled with debt, cash in the hand could be very attractive.”