18th March 2015
A pension provider has warned that people cashing in their annuities could lose as much as 30% of the value. They say this means the proposal will not make sense for most people and it wants people compelled to take advice before they make the decision.
Andrew Tully, pensions technical director, MGM Advantage says: ‘There is significant customer risk from the idea of creating a second-hand annuity market. The issues are complex but I can’t see how exchanging an income for cash upfront at a significant discount would make sense. From our calculations, you could lose 30% or more of your potential income because of costs and upfront tax. It would seem crucial that people are compelled to take advice before making this decision.”
Tully also warns that there is a sting in the tail for any potential purchaser.
“There is also a sting in the tail for the potential purchaser of the annuity income as unless they are a registered pension scheme, the buyer will also need to pay tax. It is good to see the Government has announced a formal consultation on this idea rather than simply present the industry with a fait accompli.”
Jon Gwinnett, Pensions Technical Manager at investment platform Nucleus says: “We have very real concerns about how any secondary market would be regulated, and also over whether the re-sale or surrender value of annuity contracts will offer good value for consumers. Consumers need to have the correct advice available to them.”
LV=’s Managing Director of Retirement Solutions, John Perks says: “LV= is supportive of the proposal, although it will not be an easy thing to do and we need to be mindful of the possible dangers for customers. Cashing in and spending an already poor value annuity will only worsen an existing problem. Likewise cashing in a good value annuity could also cause customer detriment. However, as part of the pension freedoms, it makes sense that all retirees should have the opportunity to achieve a better income outcome. We believe we can do more to understand the potential risks and benefits here.”
Welfare will not make up the difference
Pensioners currently receiving annuity payments will not be compensated for the loss of income from the benefits system, the Government has said.
The move will protect taxpayers, but experts say it will also make it less likely that people will cash in.
Malcolm McLean, senior consultant, Barnett Waddingham says: “It is interesting to note that in order to protect the taxpayer, the government does not intend to compensate individuals through welfare for any loss of income resulting from assigning their annuity to a third party and would therefore like to consider whether those receiving means-tested benefits should be able to do so. This could be a particularly confusing area for benefit claimants who might find their benefits withdrawn or reduced for a period of time on receiving the lump sum from the annuity exchange and then subsequently being able to secure an increased rate of pension credit (for example) in consequence of the loss of an annuity as a regular form of income.
“I’ve got a feeling that although there will undoubtedly be some people who could benefit from exchanging their annuity for cash, the likely poor deals on offer and the complexity involved may make this new extension of the freedoms unsuitable for the majority of existing annuitants.”