Steve Webb’s proposals may be one step too far for the pensions industry
Pensioners who have already bought annuities may be allowed to sell them for cash, announced Steve Webb, the pensions minister, on Sunday.
We will publish our verdict on the proposals tomorrow. In the mean time, here are some of the first reactions from the industry:
Malcolm McLean, senior consultant, Barnett Waddingham:
“In some respects this is a logical extension of the major policy shift announced in the Budget affording new retirees the option of taking some or all of their pension savings in cash in preference to using them to purchase a lifetime annuity.
“However, as always, the devil will be in the detail and whether, as Mr Webb envisages, sufficient pension funds and insurance companies will be interested in acquiring guaranteed income streams that are linked to people’s lifespans and are prepared to pay an acceptable premium for the purpose.
“Protections will probably be needed to prevent pensioners - especially the very elderly - being ripped off if they choose to trade in their annuities for cash. For many the cash option may well not represent good value for money although for others with, for example, a standard rate annuity but developing health problems and shortened life expectancy the opposite may be true …
“The reforms will require legislative changes which will not be able to be implemented in the new parliament. Whether they will go ahead exactly as Mr Webb proposes must be uncertain at this point in time. I have got a feeling that for a new Government possibly of a different political persuasion this all may be a “bridge too far” and may get shelved until such a time as experience of the start of the Budget changes in April is fully and properly evaluated.”
Jamie Smith-Thompson, managing director, Portal Financial:
“Whilst some people doubtless wish they could get out of their annuity and invest in an alternative, it is difficult to imagine many scenarios where the buyer is going to give them good value for money. In principle what is being suggested is similar to the Traded Life Policies market, which the FCA considers to be a very high risk one for the buyer – so it only works if the buyer is getting a bargain.
“It is all too easy to imagine older pensioners being bullied by their families into selling their annuities for a lump sum for their own needs, leaving the pensioner more reliant on the state.
“It is all too easy to imagine older pensioners being bullied by their families into selling their annuities”
“On the other side of things if you had an annuity and found yourself facing a critical illness, would that be a great time to sell your annuity, without mentioning your medical situation?
“With an annuity, as things are, you know where you stand. It gives you a certainty of income that you can plan around. Selling this shouldn’t be taken lightly, and proper advice should be sought if it ever becomes an option. I can’t imagine that it would be an option we would advise taking very often.”
Kate Smith, regulatory strategy manager, Aegon UK:
“The industry is already under significant pressure to deliver the various legislative changes this year. The latest proposal from Steve Webb generates a long list of issues and risks for the industry and customers.
“Quite clearly the pensions minister sees this as a big vote winner”
“The first and most obvious of these is the fact that a lifetime annuity is priced on the life and medical conditions of that particular customer. So if it was sold on, the new risks and medical conditions would need to be re-priced in as part of the transaction. This might not turn out to be attractive to either the buyer or seller …
“Quite clearly the pensions minister sees this as a big vote winner. Another winner would be the Treasury, as people selling annuities will be taxed at their marginal rate when they receive the cash value of their annuity. This could unknowingly push a lot of people into a higher tax band.
“If this option becomes ‘real’ it will be absolutely imperative that people get advice so they understand the implications of what they are getting into. We’re certain the FCA would be interested in this new market to ensure any new buyer is regulated to ward off an onset of more pension scams.”
Nick Salter, President of the Institute and Faculty of Actuaries:
“We maintain that offering greater freedom of choice can offer flexibility and opportunity for pensioners but allowing existing pensioners to surrender their annuities will not be straightforward - for consumers or annuity providers. In the midst of a large number of pension reforms, this further change would reinforce the need for individuals to have good guidance and, where required, good independent advice.”
Tom McPhail, head of pensions research, Hargreaves Lansdown:
“It is to the government’s credit that they are continuing to seek new ways to reinvigorate the retirement savings sector and to encourage investors to take control of their own money; we just don’t think this latest idea will ever work. Similar schemes using life insurance contracts in the past were labelled by the FSA as ‘high risk, toxic products.’
“Most market participants are currently working flat out to deal with all the other pension changes the government has thrown at them”
“It is also worth noting that most market participants who have the necessary skills to engage in such transactions are the same insurers, actuaries and pension companies who are all currently working flat out to deal with all the other pension changes the government has thrown at them in recent months.”