Just as with endowment mortgages, this annuity reform could have unintended consequences

16th March 2015 by John Lappin

The Chancellor of the Exchequer has conjured up a Budget giveaway in these difficult times for those with annuities, but it is, of course, with people’s own money.

With five million odd people in the UK receiving money from various insurance companies in the form of an annuity, allowing them to cash them in by removing a significant tax barrier holds out the prospect of hundreds of thousands and perhaps more releasing cash.

It will allow those who have already annuitised to take advantage of the very popular Freedom and Choice in pensions, though clearly not as soon as those yet to retire who can do so next month.

This is early days but it seems that having been translated a pension pot through the annuity into an income for life, it can now be translated back into a pot of money if you so desire.

The harsh reality is that successive governments, regulators and insurers failed to raise their game around annuities with far too many people defaulting into a relatively poor value contracts. The big losers were those who may have been in ill-health who would have got more if they had shopped around. So the change may even be seen as righting a wrong.

The barriers however are substantial. To work, it depends not only on the actions of the Chancellor but on the actions of market participants. We do not know the mechanisms by which people will cash in their annuities, but they will perhaps be offered a sum of money while others take over the annuity contract. Will this be the original insurer? Maybe. Will it be other players? It could well be. But much depends on the sums involved for individuals.

Too low an offer, wherever it comes from, and it may not make any financial sense, except to fund a blow out. One company has already starting talking of Saga louts in relation to Freedom and Choice.

Those who still have debt to pay, and who can pay it all off, might see some sense in releasing cash, but they’ll need a calculator handy. There may well be a small proportion of annuitants who, given the chance again, would prefer to take their chances with a drawdown contract, where effectively they reinvest their pot and take an income from it. Until we know the details, and indeed the market reaction, it is difficult to know whether this would make any sense.

Can the new system right the wrong of those say with high blood pressure or who have developed diabetes who have a plain lifetime annuity but who should have had a more generous enhanced one? Once again, a huge amount would depend on the market that develops. Sadly, for many, we are a little skeptical at this stage and it feels like there will be a lot of hoops to jump through.

Others, having initially shopped around, may actually be in receipt of a reasonably value from their annuity, but again how will they measure that?

Another issue of concern is the fact that in the past, we saw a lot of endowment contracts cashed in for what appeared to be relatively generous sums in the second hand market, but which then left a substantial number of people near the end of their working lives without a repayment vehicle for the capital sum of the their mortgage.

In those cases, it may have been better to leave things as they were and the endowment at least paid up. But its reputation was so bad that many cashed in. Annuities are not exactly popular in the public consciousness.

We suspect that Mindful Money readers are generally more in control of such issues than many others. But we suggest before anyone with an annuity in payment considers cashing in, that they take a long hard look at their own household budget, and think about taking financial advice. It will be a while before you can actually take advantage so you have some time to pause for thought and work out what really might work for you.


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