Insurers and pension experts have dismissed pensions minister Steve Webb’s plan to allow annuitants to cash in their deals as “craziness” and “fraught with difficulties”.
Speaking at the NAPF annual conference in Liverpool last week, Webb said he wants to change annuity rules to allow transfers into cash so more retirees can take advantage of pension freedoms next year.
Annuity providers can already unpick annuities for divorced couples and some allow transfers out of investment-linked annuities.
But experts say the plans to allow transfers for everyone are riddled with technical problems such as retrospectively changing annuity contracts and undermining the whole concept of risk sharing in annuities. They warn that someone in ill health would want to cash in their pot while a healthy person would likely keep the guaranteed income. This would load longevity risk onto the remaining annuitants and cause poorer returns.
Insurers say if someone wanted to cash in their annuity, they would have to sell assets to fund it. But many assets are tied up in long-term investments such as infrastructure projects that are hard to sell or would have to be sold in a cut-price “fire sale” to move quickly.
A senior insurer source says: “The disappointing thing is Steve Webb knows this can’t work but he is electioneering. He has been around the industry long enough to know how life companies work.”
MGM Advantage pensions technical director Andrew Tully says: “At the moment you can only transfer to another annuity but theoretically it could be transferred to a drawdown product. That is not in line with HMRC’s thinking because they say an annuity must be payable for life.
“We need to know if he is suggesting he would make it possible to offer transfers or compulsory to offer. That is a huge difference. If he only made it possible, then I suspect most annuity providers wouldn’t allow it.
“It’s very easy to float an idea but it has not been thought through and it is fraught with difficulties.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “This Government needs to be careful about throwing the baby out with the bathwater. Annuities still have an important role in financial planning and if they carry on cooking up policy ideas like this, we might find there aren’t any annuity providers left in the UK.”
Rowley Turton director Scott Gallacher says: “It is craziness and an extremely poor idea. If you allow unwinding of annuity contracts, then it would destroy confidence
in pensions for annuity providers overnight. I cannot believe the pensions minister would openly discuss such an idea.”
Carl Melvin, director, Affluent Financial Planning
I am uncomfortable with the notion the Government can rip up all annuity contracts by railroading insurers. Is it legal? What about the cost of annuities, providers and the other annuitants in the same pool?
Robert Reid, managing director, Syndaxi
This is giving up a guaranteed benefit and not knowing what they will get in return. You will get advice and compensation claims to a ridiculous level. Some providers might de-risk if they are under pressure from the FCA.