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Experts slam ‘crazy’ Steve Webb plan to unwind annuities

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.”

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. Mr Webb has little to lose, he will not even be an MP next year let alone a minister.
    He is either an opportunist or a clown, neither is big or clever.

  2. Interesting stance? Im sure IF the life offices are happy to do this, then the govenment will be happy to refund all the 55%/35% tax charges they have taken in the past years as well??? Somehow i dont think so…..

  3. When is a contract not a contract. Apparently, whenever Mr Webb says so. This is such an illogical thing to do that it almost defy’s comment. The current coalition seem determined to ensure that no citizen is insured for longevity. Pensions crisis? What crisis?

  4. From reading a more complete account of Webb’s comments, it appears more likely that he was alluding to providers working with customers to agree reasonable terms for “cash-in”, particularly for smaller pots. This isn’t actually that unreasonable, and could help undo the poor value purchases effectively mandated by the rigidity of the triviality/small-pot rules.

    Universal unwinding of annuities is obviously a non-starter for so many reasons that it’s hard to know which one to pick first. I’d be surprised if Webb wasn’t aware of this, and the cynical may wish to draw their own conclusions about what motivated his comments.

  5. Doesn’t this prove yet again that politicians don’t know what they are talking about – and double so when it comes to pensions.

  6. Having heard the speech in person you need to put the comments into the broader context which was that “retirees” are capable of taking informed decisions whereas younger savers aren’t. If you accept that then there is some logic to the idea which is that it’s unfair that those who annuitised recently should lose out when others in similar circumstances will have a lot more freedom. In terms of transfer of liabilities it’s similar to DB trustees buying out their longevity risk -although of course that works on a bulk rather than individual basis.
    All of that said it’s hard to see this getting off the ground unless it was made mandatory with regulations akin to CETVs – and as someone has said that probably would be the deathknell for annuity provision.
    My take on the speech as whole was that it was an end of term reflection on what had been achieved – perhaps viewed through amber tinted glasses at times – along with some blue (?) sky thinking about what else could be done. To me the most interesting idea was to move to a uniform rate of pensions tax relief – higher than the current base rate – and hand in hand abolish the LTA and annual allowance which really would simplify pensions.
    Although you may not agree with many or any of his ideas I think his term as pensions minister has been enormously invigorating. As someone once said the only limits are those of vision – and he is a visionary.

  7. Webb has made plain that this is only his personal view and not official or even unofficial LibDem policy. It won’t happen so why worry about it?

  8. Charles Seymour-Cole 17th October 2014 at 10:53 pm

    WOW!! These politicians are getting really desperate in their bid to get re-elected!!!

  9. So much has changed and one would have hoped that it would all be for the good but many have reservations about some changes that have been made and some that have been proposed and some that should have been addressed but were ignored. Some of you already know that I am referring to the frozen pensions that are imposed on pensioners abroad dependent on the country of residence.
    Consequently as one who is frozen I just hope that Paul Woolley is right ! The system could do with change but this has been a bad policy from day 1 and governments over the years failed to get to grips with it and this one has also failed miserably.

  10. Andy Robertson-Fox 18th October 2014 at 9:25 am

    Steve Webb “crazy” ?

    Only just realised that?

    Anyone who has tried to understand his stance on frozen pensions and sought to follow his line of reasoning at the Scrutiny Stagee of the Pensions Bill – now The Pensions Act 2014 – has known that for over four and a half years…ever since he reneged.

    But as this article is about annuities I won’t digress…some might think it would be hijacking!

  11. @John Moret
    It would be presumptuous to argue with a pension ‘guru’ such as you, but I have an awful feeling that you may yet live to regret your current view.

  12. As Mick Hudson says, of it unwinding of trivial pension sums, then that could work for all parties, but not for larger sums.

  13. Years ago, we took over a client who had a very small Norwich Union (as was) annuity, paying about £100 pa which had been in force for some time. Out of the blue, we received a copy letter from NU confirming they’d offered the client a lump sum in lieu of the future annuity payments, which he’d accepted.

    So the ability to cash in is already available, but subject to the provider’s agreement. Being able to do this for small annuities up to a certain limit should be a good thing, but to automatically require all annuities to offer it would cause considerable issues.

  14. Julian: The NAPF didn’t invite him to speak as some random off the street, they asked him to speak in his capacity as Pensions Minister, which means that anything he says represents his office, whether or not he prefaces it with “This is just my opinion”.

    When a public figure speaks to a big crowd of industry figureheads and journalists and starts by saying “This is just my opinion, but…” what they mean is “This is just my kite that I am flying, but…”

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