The government plans to remove the restrictions on buying and selling existing annuities from April 2016 to extend its pension freedoms to five million people who have already bought an annuity.
The proposed legislation is aimed at allowing pensioners to sell on their annuities, with the returns then allowed to be taken as a lump sum or placed into drawdown.
Under the plans, selling an annuity will not unwind the contract. Instead, the provider would continue to pay the annuity payments for the lifetime of the annuity holder, but would reassign those payments to the purchaser.
Currently, people wanting to sell their annuity to a willing buyer face a 55% tax charge, or up to 70% in some cases. The government will remove this, so people will be charged at their marginal rate.
The government will publish its consultation on how to establish a market for buying and selling annuities on 18 March, and will work with the Financial Conduct Authority to introduce appropriate guidance and other protection measures.
Chancellor of the Exchequer George Osborne said: “There are five million pensioners who are locked into annuities they have already bought. They should have the same freedoms as we have given everyone else.
“For most people, sticking with that annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose, the same freedom we are offering those approaching retirement in April this year.
“I am going to change the law to let that happen, and make sure we have the right guidance in place.
“People who’ve worked hard and saved hard all their lives should be trusted with their own pension.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, added: “Unlocking an annuity in exchange for cash is bound to appeal to some people who want either a lump sum now or the flexibility to dip into their pension pot at will.
“There are significant practical obstacles to overcome and this scheme may never get off the ground, however the consultation presents an opportunity to explore whether it is possible.”
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.
the government needs to cut the age that people can take their pensions to 50 from 55