16th March 2015
Over the weekend the Chancellor announced that the government would extend its pension freedoms to around five million people who have already bought an annuity. Barnett Waddingham senior consultant Malcolm McLean looks at George Osborne’s latest move to boost support ahead of the general election…
From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract.
They will then have the freedom to use that capital as they want – just as those who reach retirement with a pension pot can do under the pension freedoms announced in Budget 2014. They can either take it as a lump sum, or place it into drawdown to use the proceeds more gradually.
Further details are expected to be revealed in the Budget Statement later this week.
Whilst this will doubtless be welcomed by many of those people who feel they have not received a good deal from their earlier purchase of an annuity, it is difficult to avoid the impression that the timing of the announcement so close to the General Election owes more to political expediency than anything else.
At this stage it is not clear what sort of market exists for this purpose and what kind of deals consumers can expect from it for giving up their guaranteed income for life in return for a cash lump sum. There are also practical difficulties in assessing life expectancy in individual cases based on medical evidence and keeping track of actual lifespans for the purpose of continuing entitlement to the income stream from the annuity.
Early indications are there is every possibility of serious consumer detriment for which adequate guidance and protection arrangements need to be in place if this is to be avoided or at least minimised.
There is also the question of how much extra cost there will be on the public purse arising from the change. It is far from clear at the moment whether those people who trade in their existing annuities for a cash settlement will be allowed to fall back on means-tested benefits, notably pension credit, later on.
The Government has previously indicated that it was the decision to bring in a single-tier state pension at a substantially higher level than the current basic state pension that facilitated/underpinned the new pension freedoms in private pension saving. As the new state pension when paid at the full rate will exceed the pension credit threshold, albeit only marginally, new pensioners after 6 April 2016 who spend all their money would not be able to claim any credit on top of their pension.
However, existing annuitants over state pension age before 2016 who are receiving only (or little more than) the basic state pension could find if this policy change goes ahead without restrictions that by exchanging their annuity for cash their lower level of income will give them sooner or later an entitlement to a top-up from pension credit. Will that be permitted? As ever, the devil is in the detail which hopefully will be made available as soon as possible.