Five million annuitants set to get right to cash in their pension or convert it back into an investment pot

15th March 2015

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Five million people with annuities in payment are to be allowed to cash them or convert the annuity into an investment. The Chancellor of the Exchequer George Osborne confirmed his intention to announce the change in this week’s budget.

The proposal is to be put out to consultation, but it means that those who have already purchased an annuity will be able to access the new Freedom and Choice reforms.

Currently it is theoretically possible to trade in an annuity but it attracts a 55% tax charge. The Government is proposing replacing this with an income tax charge, the form of taxation due to be applied to those accessing their pension money through Freedom and Choice.

Questioned on the BBC’s Andrew Marr show about the risk of pensioners blowing the money, George Osborne said: “I just think that is a very patronising attitude to take towards people who have shown responsibility, saved through their lives, saved for a pension. By changing the law we are trusting people who have worked hard and saved hard all their lives.”

There is some scepticism about the practicalities of the reform.

Tom McPhail, head of pensions research at Hargreaves Lansdown said: “The new pension freedoms are immensely popular with pension investors coming up to retirement, so it is hardly surprising the Government is looking at ways to extend them to those already in retirement too. Unlocking your annuity in exchange for cash is bound to appeal to some people who want either a lump sum now or the flexibility to dip into their pension pot at will. There are significant practical obstacles to overcome and this scheme may never get off the ground, however the consultation presents an opportunity to explore whether it is possible.”

McPhail has also set out how he believe the reform might work. He suggests that existing annuity holders would be allowed to sell their annuity income in exchange for cash, either as a lump sum in their hands, or as an investment into a drawdown contract. In either case they would be liable for marginal rate income tax in the year in which any payments were received. This would keep the tax treatment consistent with other pension investors using drawdown or taking cash from their pension for the first time. The annuity contract itself would not be unwound and the income payments would continue to the new owner, who would have paid the original contract holder a cash sum in exchange for the income stream.

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