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Pensions minister calls for ability to ‘unwind’ pre-Budget annuities

Pensions minister Steve Webb has argued people who bought annuities before the Budget should have the option of unwinding them.

Speaking at the NAPF annual conference in Liverpool yesterday, Steve Webb also said he wants to change the rules around annuities to allow people to turn them back into cash in the future if they want, but he expects annuity providers to object to the extra cost and complexity of bringing the idea to life.

Webb said he was concerned people who had already bought annuities with their pensions might feel like they had missed out on the pension freedoms announced in the Budget.

He told Money Marketing: “For any future income stream there’s a cash equivalent out there. In concept there’s no particular reason why someone who’s 75 and wants some capital shouldn’t be able to do this.

“In principle, if we had a basis for coming up with that number and people said ‘it’s not very exciting but I’d rather have £10,000 than a tenner a week for the rest of my life’, if the roof’s just fallen in or something, I need the capital now, not the income. Is that so wrong?”

But Webb predicted insurers would probably object to the plan over costs. He said: “Insurance companies are going to say: “hang on I’ve bought the assets to back this promise and now I’ve got to reverse out, there’s cost to me” – there’s a lot you’d have to think through.”

Moving forward with the idea has been ruled out before the general election but Webb said he would be “making the case within my own party”.


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There are 21 comments at the moment, we would love to hear your opinion too.

  1. At last hope for those of us who were wrongly advised by so called professional advisors.

  2. Tricky D – How would it have been the wrong advice to annuitise if that was the best option for you, before all of the changes announced in the budget? Advisers cannot be expected to predict the future, particualrly when it comes to the whims of politicians.

    I recall your comment back in September and the basis of your gripe seems to be that you took tax-free cash and bought an annuity, which was paying you an income, yet you expected to be able to take the remainder as a lump sum. You didn’t respond to my question as to whether the details of the annuity were covered in the suitability report from your adviser. You also didn’t explain where you imagined the income that you were receiving from the annuity was coming from.

    On topic, this has to be Steve Webb’s most questionable suggestion to date, and there have been a few contenders for that title.

  3. Mr Webb has had a good run as Pension minister but perhaps this is a comment out of context.

    Would the Government mind allowing those individuals who paid tax at 50% to unwind the position and pay tax at the current rate of 45%!?

    Has Mr Webb gone too far now with his thoughts?

    Perhaps he should focus on AE again where he has done a good job until now. Is there a chance Steve that small employers can avoid AE – I can see a lot of very small employers having a NIL take-up in a NEST based arrangement. Lots of costs for NEST with very little take-up!!!!

  4. That opens a whole new can of worms…

    Might the 75 year old in Steve Webb’s example have potentiallly outlived their fund, especially if they have a smoker/enhanced annuity?

    So (tongue in cheek here) a request for a ‘cash equivalent’ could result in a counter-claim from the provider?

  5. This is going well overboard. In the unlikely event that this ever comes to pass, should we consider for example if it would be cheaper to borrow capital on the back of guaranteed annuity income rather than to “unwind” an annuity.

  6. @TD 10:32am. How did the Ombudsman rule on your complaint?

  7. Webby, the men in the white coats are here ready to collect you.

  8. It’s a nice idea, but it will never work in practise. It’s not just the costs of selling the investments that would hurt insurers, the scope for anti-selection would be unbelievably high. For example, anyone who thought they might die soon would cash out, leaving only the healthy lives to carry on receiving payments for much longer than the insurer originally planned, increasing the reserves and threatening the solvency of these businesses (threatening pensioner security in the process).

  9. In theory, the current legislation allows for an transfer of annuities between one provider and another I think. In practice, no provider offers it that I know of. It is after all a commercial contract and it is for the provider to draft the contract and the consumer to decide whether they want to accept it or not.
    I think the Govt would need to change the legislation to allow complete unwinding of an annuity and for the funds to be paid out less tax. Some providers for what are pretty much trivial pension sums, might feel it worthwhile allowing it, simply to get them off the books, working to a deminimis limit.
    But as Chris says, there is a serious risk of anti-selection which would require fresh underwriting (and probably a medical) to prove that the individual should still be in the same annuity pool and I can’t see it therefore being a commercial option.
    The annuity was, as all advisers I know explain to their clients a one way street contract, so any of my clients in an annuity should have known (as I would have a recording of having xplaiend it and their responses) that was the case while those in drawdown, would have known (recorded explanation) that they would not benefit from mortality gain due to not being in an annuity pool and would be continuing to take investment risk as a result.
    I really do think the politicians are thinking too much about relatively small sums of money in annuities when they really should be concentrating their time and efforts on the wider UK and world economy. It’s a bit like the emperors new clothes as I have said before, all these changes masking the indecency of the underlying problems. Personally I think the scandal of Milk be produced at more cost than the sale price (in part influenced by sanctions against Russia on Milk imports) are more of an issue than annuities. Once we loose our dairyherds and herdsmen/women, it has gone.

  10. Of course the minister is right. I’ve been saying the same for long enough. First of all, those who got themselves landed with annuities after drawdown was available. Start there. Did they know drawdown was available? Was the adviser just keeping the regulator happy? Does the regulator really think that handing life offices all that money and allowing them to reap the benefits of dead people’s money, and new annuitants getting enticed into the damn things with dead people’s money, was the right course of action? There needs to be one hell of an enquiry into the whole scandal! PPI has nothing on this. A comment above. “Benefit from mortality gain”! I don’t want strangers to gain from my death. I don’t want life offices to gain from my death. “Mortality gain” are offensive words!

  11. Since the Budget the Government has consistently and correctly claimed that annuities are, and will continue to be, the right product for the right people. The pooling of mortality gain provides extra lifetime income and lots of people requiring a guaranteed income need any extra they can get. If annuities did not currently exist they would be invented today.

    Mr Webb’s ambition removes that mortality gain and therefore would actively deny people the option of an annuity.

  12. If a client aged 65 presents with £250,000 saved in cash ISAs over the years but has no pension investments above maximum state (including SERPS), how many advisers would recommend a lifetime annuity? Arrest the man who recommends one!

  13. Ken – That’s a little bit different from buying an annuity with a pension, since purchasing an annuity with ISA money would result in some of the income being subject to tax, which could be avoided by keeping the money in the ISA and drawing an income as required. Aside from the 25% tax-free element, any pension drawn as income, regardless of how it’s done, will be subject to income tax.

    If the client in question was averse to risk and heavily reliant on the ISA funds to provide for him in retirement, a product that provided a tax-free, guaranteed income for life wouldn’t loook like a terrible option for him.

  14. @Ken – I have a client who was adamant she didn’t want an annuity despite the fact conventional wisdom was that it was the right product for her. She IS in drawdown, NOT what the regulator might like, nor the FOS, but every time I have seen her, for nearly ten years has been to remind her my advice based on a combination of attitude to risk and needs has been to at least purchase an annuity with some of her not insignificant funds. As is happens her steadfastness has meant that the legislation has caught up with what she wants at last which is good.
    Good advice should result in the client making an informed choice, whether that be drawdown or an annuity. Mortality gain does have it’s benefits as does secure income for life. With the change in rules, I hope that purchase life annuities become more competitive as we see compulsory purchase annuities reduce.

  15. Ken you only advise people after fact finding and attitude to risk and ability to sustain loss.
    So your client may have several possible outcomes depending on this.
    Webby is a clown in a circus and must not be encouraged.

  16. Ken, fact find, attitude to risk and capacity for loss need to be sorted before any advice given, your client may have a few different solutions on this basis. Mr Webb is a clown and we should not encourage his dangerous meanderings.

  17. Many annuity providers invest in long term infrastructure projects in order to generate the income required to pay clients. How does Webb propose they unwind these investments in order to cough up the lump sums people want?

    @Ken – “Of course the minister is right. I’ve been saying the same for long enough. First of all, those who got themselves landed with annuities after drawdown was available. Start there. Did they know drawdown was available?”
    If they purchased an annuity through an adviser then, yes, they would have known drawdown was available and through a fact find, attitude to risk questionnaire and detailed conversation regarding the pros and cons of all options will have decided that an annuity without it’s investment risk is the best option for them. Those that didn’t use an adiviser took the risk of thinking they knew what they were doing and accepted the potential that they could get it wrong.

    One of the problems that pensions have had in the past is the movement of goalposts and constant fiddling of the rules by the government. Not having a consistent set of rules undermines pensions.

  18. Neil, I suppose the 250K in an ISA could be held in a platform and an annuity advised. Let’s not complicate it. You know the point. No one in their right mind uses their money to buy a lifetime annuity unless they know in advance when they are going to die and when their spouse is going to die. If those questions are correctly answered on the factfind then the ghost will not haunt you.

  19. Ken, the FCA had a stance until recently and perhaps still have that they advise it is unwise to have drawdown on a fund of less than £100k as it to much of a risk. Did you know this ?
    Annuities are still good advice for some clients since some people are risk averse and need a steady income with no risk.

  20. @Paul W – Yes that is the FCA and FOS stance. a bit like the stance on occupational final salary pension scheme needing to start from the premise that a transfer is NOT appropriate so the reverse has to be clearly proven and documented.
    However, when someone has a fund under £100k at 55 and wishes to access their PCLS for a specific purpose, continue working and continue paying in to their pensions, I would argue that if their attitude to risk and capacity for loss is correct (May be their spouse has a massive fund for instance), that it is and always has been unlikely that an annuity would be appropriate for them at age 55 (or 50 as the minimum retirement age was in the past) and that drawdown is likely to be appropriate for another 5 or 10 years for them at least as if it was right to be in equities at 54, it is likely to still be at 55, 58 and so on, but subject to the triennial reviews required (or preferably annual as is more appropriate with drawdown).

  21. Well Paul, if the FCA were telling advisers to get annuities for their clients, I wouldn’t like to be in their shoes when clients start knocking at their door wanting to know why. OK for advisers: “I was only following the rules. Don’t blame me, it’s the regulator’s fault.”

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