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 yesterday, 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 infrastructure projects which are hard to sell or would have to be sold in a cut-price “firesale” 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 specialist 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 also 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 when you look at it then 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 bath water. 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 can not believe the pensions minister would openly discuss such an idea.”