The government’s vote-winning plans to let people sell their annuities may prove misguided
Many in the pensions industry were hoping for an uneventful Budget. With the industry rushing through changes to help savers take advantage of their unprecedented new pensions freedoms, there was already enough to do, the argument went.
Their hopes have been dashed. George Osborne will announce in Wednesday’s Budget that the government will consult on whether existing holders of annuities should be allowed to sell them.
The proposals are clearly designed to capture the influential grey vote. Choice is always a vote-winner and in this case it’s served with a side order of voter-flattering rhetoric. “By changing the law, we’re trusting people who’ve worked hard and saved hard all their lives,” Osborne said twice on Andrew Marr’s BBC show.
The proposals make sense for consistency’s sake. Why should existing annuity-holders be stuck with them, while those retiring now have many more options open to them?
“The practicalities will be complex”
In the same interview, Osborne emphasised that the annuity will remain the right product for many people to have purchased. He damned fears that people will cash in and buy a Lamborghini with their money and then complain to the state as “a very patronising attitude to take towards people who have shown responsibility… saved for a pension.”
In the past, defined benefit savers were effectively defaulted into gold-plated pensions without needing to understand the intricacies involved.
And today and tomorrow’s defined contribution savers are going to be auto-enrolled into default funds – a process which is again designed to minimise the need for comprehension and interaction.
Therefore, it’s hardly patronising to think it’s unrealistic to expect savers to immediately grasp a very complex set of new choices.
The practicalities of letting savers cash in on annuities – and the government estimates there are 5 million savers in the UK who have existing annuities – will be complex.
The second-hand annuity market will have to be carefully regulated. Otherwise, what’s to stop retirees who unexpectedly find themselves in urgent need of cash from flogging their annuity to the first bidder – leaving them exposed to predatory second-hand annuity salespeople?
Ideally, people would take advice before selling their annuity. But advisers may not be interested in people with smaller to mid-sized annuities. And the government’s Pension Wise service can hardly be expected to pick up the slack; it is already being criticised for being under-resourced and too generic to provide people with meaningful advice.
A Towers Watson paper raises the question of whether people receiving income from defined benefit pension schemes would be able to sell their pensions back to the scheme. This would surely open up a new realm of complexity for pension fund trustees.
Despite insisting to Andrew Marr that this Budget will have “No giveaways, no gimmicks”, it’s hard not to see Osborne’s attack on annuities as election candy for grey voters.
If implemented, will the policy prove as disastrous as Gordon Brown’s tax raid on pensions? It’s impossible to predict without understanding how people will use their new freedoms. Sadly, as is ever the case with pensions, only time will tell.