27th March 2014
Caught in annuity limbo? Financial journalist Tony Levene looks at the current state of play between pension firms and the Treasury to see if they have thrashed out the details.
It’s another day – and another bout of chaos – with the politically popular but organisationally inept end of compulsory annuities for most personal pension holders.
Rules are both being implemented and abandoned “on the hoof” as new problems emerge from the shock policy change – the biggest since 1921 and the biggest ever in terms of people and savings affected.
But there are signs that after a week in which annuity and pension providers privately refer to as “organisational mayhem”, firms and the Treasury are working to avoid consumer detriment.
A number of leading annuity providers have already extended their cooling off periods, giving in some cases a second chance to those who bought income for life products in up to two months prior to the budget announcement. That opportunity to roll back the rules for those caught out by the sudden budget announcement was however negated by the other side of the pension rules which banned pension providers – even if they were the same as the annuity company – from taking back a pension once a customer had taken the 25 per cent tax free lump sum.
Most take their lump sum at once – and they then have six months in which to buy an annuity. Effectively, their money is frozen between the two decisions. So up to around 60,000 who might have changed their minds on annuities were prevented from doing so because they fell foul of other legislation. They were banned from handing back the lump sum and, even with enhanced cancellation periods, they cannot do anything but buy an annuity within six months, unless they are prepared for the risks and costs of a drawdown.
“People are in limbo. They don’t want to go forward but they can’t go back,” says William Burrows at Annuity Line.
On Wednesday, ABI director of policy Huw Evans said the industry needs “urgent clarity” from HMRC to resolve this difficulty.
He said: “Pension and annuity providers were given no advance warning ahead of the Budget changes that came into effect within a 10 day period. It introduced a cliff-edge for customers and it is wholly unacceptable that a week after the Budget HMRC has still not clarified the rules around whether tax free lump sums can be reversed for those customers who have just annuitised and wish to change their mind.”
He added: “The current HMRC rules state that this is an irreversible benefit – yet providers, customers and financial advisers need clarity urgently if they are to navigate the current situation. Insurers remain committed to working with each other closely to help customers who wish to exercise ‘cooling off’ rights but the Government has to do its part to recognise the urgency of clarifying the post-Budget situation it has created.”
But now the government has acted on this point. Buried in a Treasury statement are two paragraphs intended to resolve the issue.
It says: “The government is also changing the current rules that require people who take up to 25% of their pension pot as a lump sum to “secure an income” within 6 months, which is usually an annuity.
“The government intends to include legislation in Finance Bill 2014 to ensure people do not lose their right to a tax-free lump sum if they would rather use the new flexibility this year or next, instead of buying an annuity.”
In other words, those retiring who have taken their lump sum but who want to cancel an annuity purchase can now do so without running into rules designed for the compulsory annuity era.
Many of the annuity providers most active in the “open market option” market which allows a choice have extended their cooling off periods. And even there is even a glimmer of light from Legal & General, which has refused so far to amend its 30 day cooling off period, to a less dogmatic position offering some help on a case by case basis.
L&G says: “Customers have a 30 day cooling-off period that starts from the date that they sign their annuity application form. If they wish to cancel their annuity within this 30 day period then they are able to do so and the money will be returned to their pension savings provider.
“It is not possible for customers to cancel their annuity outside of this 30 day period. We believe that the terms for cancellation are clearly communicated to all customers when they arrange their annuity with us, so currently we do not have plans to extend the 30 day cooling off period.
“However, we do appreciate that for some customers the Budget announcement may not have left them with a lot of time to consider their options, so we will continue to review the position and as always, will consider any customer’s requests on an individual basis. Customer will also need to appreciate that cancellation after 30 days will require the agreement of the customer’s pension provider to accept the money back into their pension scheme.
Unfortunately, there is no uniformity among other annuity firms. The most generous is NFU Mutual which is willing to reverse decisions made from January 19.
And so far, according to Burrows, there has been no change in annuity rates.
“I welcome the freedom but there are also responsibilities. Nine out of ten of our customers who could reverse a decision with a cooling off period have not done so. The industry needs to prevent a disconnect between a proper financial analysis and emotional behaviour which might be regretted in the cold light of the future. And I don’t think the industry will be geared up in a year’s time to offer the promised advice on an individual basis. There are 400,000 a year who will need unbiased help so the £20m the government has offered only means £50 a head.”