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Steve Webb sets out ‘annuities for cash’ plans

Pensions minister Steve Webb wants pensioners to be able to trade in their annuities for cash to extend pension freedoms to those who have already retired.

In an interview with The Daily Telegraph, Webb said pensioners and major insurers had shown support for the plan, which would see retirees sell their annuity for an upfront cash payment. The changes would also create a “second hand” annuity market, allowing insurers and other firms to bundle up individual annuities and sell them on in bulk.

Webb said: ““I want to see people trusted with their own money wherever possible. I have already heard from people around the country who would like to see this change made.

“I want to see if we can get these freedoms extended to those who are receiving an annuity but who might prefer a cash lump sum.

“No one would be obliged to do so, but for those who would prefer upfront capital to regular income, I can see no reason why this should not be an option.”

Webb argues up to five million pensioners who have already retired would stand to benefit from the proposals, who are currently frozen out from accessing the pension freedoms set to come into force in April.

He said: “As things stand, once an annuity is in payment there is very little that an individual can do if they would prefer instead to have a cash lump sum or some combination of cash and reduced income.

“But, given that we now accept that individuals should be given more control over their retirement savings, I would be concerned if we were to exclude up to five million people who are currently receiving annuity income.”

Under the plans, once an annuity had been sold payment would be redirected from the policyholder to another account holder, which would likely be an insurer or pension fund. The pension would continue to pay out until the original policyholder dies.

Webb said protections would need to be put in place to protect the vulnerable if they choose to trade their annuities for cash.

He added: “I have discussed this idea with a number of major players in the industry and there is considerable interest and enthusiasm for taking it further. “It is possible to imagine, for example, a market in second hand annuities with perhaps some financial institutions buying them from individuals and bundling them up to sell on in bulk.”

Webb wants to launch a consultation on the proposals agree a Coalition plan for the reforms ahead of the general election in May.

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Comments

There are 17 comments at the moment, we would love to hear your opinion too.

  1. With the issues many face with Traded Endowment Policies still playing out, it will be interesting to see how this (potentially similar) concept pans out.

    Exchanging a mortality linked income stream for capital is likely to be costly (for the annuitant) and risky (for the purchaser) … but I’m all for innovation and choice and therefore I wait to see how this evolves.

  2. I see similarities with the packaging of mortgages which lead to the credit crunch of 2008.

  3. This is a very bad idea and should not be done!!!

  4. This is a solo run going nowhere. Does it seem like a good idea to spend time legislating a policy that no provider will want to offer, but if they do, the terms will be so prohibitive that no annuitant would avail of them? Furthermore, since 2006, (or 1995 for under-75s), exactly who are these people who have been “forced to purchase annuities against their wishes”?

  5. E L Wisty (an only twin) 5th January 2015 at 10:27 am

    In some respects a life settlement fund in reverse. However, as the capitalised value would be interest rate sensitive (not to mention the risk of the income stream being unexpectedly switched off), it will be interesting to see how these investments are valued; and how the FCA would assess such products in terms of risk.

  6. This will be the end of annuities simply because the cost will rise substantially. The reason, of course, is that the client has the very best information about their health. A soon as they get a health issue they will trade their annuity for cash. This will mean that insurers will be left with payouts for the healthy but will not have those that subsequently become unhealthy as a balance. Therefore future annuity rates will be based on good life expectancy for age rather than the average making them really expensive.

    After all, what fit and healthy 90 year old is going to trade their income for cash?

    For the same reason, the buyers of second hand annuities will do very badly or will offer very low payments.

    This appear not to have been thought trough very well.

  7. Even though Steve Webb is a pretty busy, active and generally well informed pensions minister, he is also still a politician. All the major announcements on recent pension reforms have been made by the Chancellor, not his pensions minister. Steve Webb is talking very much as a Liberal Democrat MP and would like to include this in a manifesto for any future party coalition, not as current Government policy. Therefore, it would be highly unlikely to go through in this parliament. As Steve Webb appears to be driving this personally, to get it through, he would have to be re-elected, there would have to be another Lib Dem coalition (with someone?) and then also be included in yet another pension bill amendment. Even if it does have merit, there are plenty of hurdles before it would arrive, and then only with plenty of complexity and risk.

    If it did go ahead, the client would be squeezed at ‘both ends’ on the lump sum offered. At one end they would have the risk of their own health and age driving the lump sum amount, with the investment firm building in a substantial margin for risk, and at the other end a probable tax charge to replace the tax loss from the income payments.

  8. Oh dear !!

    As Che holds his head in dis-belief !

  9. Money Guidance CIC 5th January 2015 at 10:58 am

    Not a very helpful move towards reducing the Budget deficit – jam today and more State benefits demanded tomorrow.

  10. Sorry but I can see this going nowhere. The idea is simple (from a PR point) and sounds more good electioneering than good business sense.

    The risk to the purchaser of the annuity is undefinable I feel but only time will tell. Personally I cannot see a circumstances where these type of products, either singular or bundled up, would be attractive to an investors. Especially given the mortality risk. Then the there is the point about fair value – what defines an annuitant receiving fair value?

  11. As Pension income is regarded by HMRC as deferred pay, and taxed as earned income, are we to assume that any capital payment made for the purchase of an annity contract will be taxed as income in the hands of the recipient?
    If so the tax collected will be significant, and will the consumer understand this?.

    Please forgive me for being cynical:

    Is this an Orborne sponsored tax grab and a national spending stimulus combined?

    Can you begin to imagine what the financial adviser’s suitabiliy letter might look like?

  12. As Douglas mentioned what will the tax be on the capital payment – no doubt people will get a nasty shock when income tax is applied at the appropriate rate.

    Also the Government trusts the public with regards to pensions why has Auto Enrolment been introduced?

  13. Why not just buy your own annuity if you are old enough to do so?

    For those who are not old enough to benefit from half-decent annuity terms, why would anyone really want to invest a lump sum into purchasing an uncertain income stream, based around the health and well-being of an unknown individual or individuals?

    You also have to ask yourself why it suits product providers to take such a notion forwards? Is it perhaps to enable them to reduce their annuity book and its contingent liabilities and to provide better liquidity for their businesses? After all, who wants an annuity book these days?

    Electioneering at best, crazy talk at worst!

  14. Once again Mr Webb highlights his lack of understanding of the pension market.

    This idea has more holes than Swiss cheese.

    As other commentators have mentioned which providers are going to take the risk of purchasing an annuity? How do they quantify the risk and price accordingly? What happens when the pensioner has spent all of their lump sum as they lived longer than they thought? Miss-selling scandal anyone?

  15. This is about as daft as Willie Wonka’s Chocolate Factory. But what really, really gets my goat is the constant bleating that this shows that the politicians trust people and therefore offer them these illusory freedoms.
    If they are so trust worthy why do we have compulsory AE?
    What sanctions will apply if people run out of money and then seek state aid?

    Of course the press is also hugely guilty. They gloss over the main points. Tax (as above). The fact that this particular wheeze will probably only apply to those who have a decent final salary scheme and can therefore probably afford to unwind their annuity.
    What will this do to annuity rates? If the contract is broken, what is to stop providers breaking bargains from their end?
    The sooner this plonker Webb loses his seat and exits Parliament after May the better.

  16. Without knowing just how attractive or otherwise surrender values are likely to be, it’s difficult to offer any opinion. Just which providers anticipate there being any worthwhile public demand or benefit for them in surrendering existing annuity contracts, not least in view of the fact that they [the providers] will have all had to make very plain in all their original (annuity) marketing literature that policies of this type contain no element of savings or investment and cannot acquire any surrender value (except, perhaps, certain types on death)? Is Mr Webb proposing legislation that will override this fundamental element of conventional (and many non-conventional) annuity contracts?

    Consider Mr Jones, whose original fund, after having taken his TFC, was £50,000 with which he purchased an annuity three years ago of £2,500 p.a. What is his reaction likely to be to a proffered surrender value now of not £42,500 but, allowing for expenses, only £40,000? Deduct from that the costs of buying into something else (unless he wants to have it all now as a tax-assessable lump sum) plus advisory costs (he’d be stupid not to take advice) and the whole proposition simply doesn’t stack up. It might just if he’s suffered a downturn in health and can now buy an enhanced annuity but otherwise I just don’t see it working or at least being at all the best course of action for the vast majority of existing annuitants.

  17. Anything that offers more choice has to be a good thing.

    Buyers will have to pay based on health and age – fully underwritten; I’m certain of this.
    From my experience there is a huge demand for those wanting to sell.
    I think it offers a real opportunity for advisers too – it’s a whole new market we’ve never had in the past!

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