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Treasury dismisses Steve Webb plan to ‘unwind’ annuities

The Treasury has dismissed pensions minister Steve Webb’s plan to “unwind annuities” claiming it cannot rip up existing contracts.

At the Taxation of Pensions Bill committee hearing last week, Treasury financial secretary David Gauke said there has to be a cut off point for people accessing new freedoms, opening up a clear rift with his Liberal Democrat coalition partners.

Last month, Webb said he wants to change annuity rules to allow transfers into cash so more retirees can take advantage of pension freedoms next year.

Experts slammed Webb’s idea as “crazy” pointing to contract law, the risk-sharing of annuities and the potential firesale of insurer investments.

In Parliament, Labour MP Pamela Nash said she had constituents complaining they bought an annuity before the Budget and are angry about missing out on freedoms.

Conservative MP Gauke said: “It is very difficult to address that problem, because a contract has been entered into. Of course, one can understand and sympathise with people’s frustration, but one has to draw a point in time where the flexibility comes into place.

“Inevitably, if you draw a point in time there will be those who fall just before that point. It is extremely difficult to try to unravel contracts that have been entered into.”

He added: “There is an inherent difficulty; a consequence of providing flexibility is that there will always be a cut-off point. One could extend it and go further back, but is then left with someone else who has entered into a contract immediately before that cut-off point.

“Although I have a lot of sympathy for your constituents, it is fair to say that they were in no worse position as a consequence of these changes than they believed they were in when they entered into the contract.”

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. Well they would wouldn’t they? Justice should not have time barriers. People were forced into these contracts, they had no choice. Steve Webb, keep up your good work!

  2. Webb is indeed a wet lettuce

  3. But first of all, Mr Webb should ask to investigate those cases where people were advised to take annuities when drawdown was available. If they had been advised to opt for drawdown they would have access to their own money from next April. As it is, a life office has their money. Let them have their own money back if they want. Let them choose. If people knew what was being decided about their money there would be a revolution. Unfortunately the subject is so boring no one knows what’s going on.

  4. I think the treasury is right in this decision. In a democracy (even in the UK) it would be wrong to start trying to unwind in force contracts. This would only be the start of it. @ Ken Durkin. Please check on the number of complaints surrounding drawdown over the past 6 years and there having been some huge reductions in income post reviews due to lack of out performance over charges etc. You may well be quite surprised. It is ludicrous to make sweeping statements like “investigate those cases where people were advised to take annuities when drawdown was available” and expect this have any validity. Every case on its own merit. We have to work within the law and regulation and at the time you are talking about, the only allowed drawdown or annuities (in their many guises). Regulators regularly told us they would not expect to see drawdown done on funds less than £100K, even though some providers gave it from £10K. They have just recently dropped this to £50K given the freedoms which are now on their way. You would be a very brave adviser to constantly defy their “would not expect to see” stance as we all know what that means in reality. Annuities always have had their place and always will as will drawdown for the right people. However a sweeping statement such as yours does nothing to add anything but petrol to a fire. IMHO of course.

  5. @Marty. In a democracy it would be right to let people have a choice when previously they had no choice. You can dress it up how you like but the fact remains that taking money from a person against their will is also called “theft”. Steve Webb has been trying for 13 years to get this across to people – advisers, regulators, whoever. It amazes me how so-called IFAs haven’t got their heads round this yet.

  6. If a customer was mis-sold an annuity, they have the right to redress that effectively restores them to the position they would have been in had they not been mis-sold. However, if they were not mis-sold, then there is no justification for unwinding contracts of insurance that were willingly entered into.

    The point often gets missed that the current system already enables this. Every customer has the right to take any complaints to the Financial Ombudsman Service. If there is any evidence of mis-selling, FOS can instruct the firm to offer redress. What the published FOS rulings show however, is that in the majority of cases there is no evidence of mis-selling.

    Steve Webb, Ros Altmann etc conveniently ignore that everyone has access to FOS, and that they have assessed many claims of annuity mis-selling in recent years. It must be the only “mis-selling scandal” in history though where an independent ombudsman dismisses claims in around 95% of cases!

  7. To be fair, Webb made plain that this was just a personal idea (barmy though it is) and not LibDem policy. I can’t see how it could ever have worked in practice without causing a great deal more damage to insurers than benefits to consumers.

    All the lifetime annuities I’ve arranged over the past few years have been underwritten/enhanced ones so there’ll be little, if any, grounds for challenging those, and I have on our books a few 3 year temporary annuities which, thus far, look like they’re going to work out very satisfactorily, the investment balances on target to deliver maturity values not far short of, possibly even higher than, the original gross purchase prices. Those will be good results for which (I hope) my clients will thank me.

    Unprotected, open-ended Income DrawDown is an entirely different proposition, highly unlikely to have been suitable for any of my clients with typically modest sized funds and no experience of such strategies.

  8. @Ken Durkin – what of the many people who have done very well out of their annuity purchase and received much more than the original investment? Should the life offices send them a bill? As for those who were advised to buy annuities when drawdown was available – what if they did not wish to take any investment risk? What if they wanted a predictable, guaranteed income for life? They “would have access to their own money from April”? How many would in fact have nothing left?

  9. @ Marty, well said, there is no one size fits all and to dismiss one solution before even speaking to a client is dangerous.

  10. Whilst I can see a minority (and probably some claims chasers) arguing this is unfair, I do agree that retrospective action is dangerous and could set a dangerous precedent.

    Such an unwinding would enable people to select against insurers where it’s in their best interest to move into drawdown (i.e. they may now have a terminal illness) – it also gives the insured a second ‘bite of a cherry’ which is, to be fair, a gamble for both parties (i.e. insurer and insured).

    Whilst I have no allegience with Insurers, things have to be fair and contracts need to be binding.

  11. John Lawson’s MM article is well worth reading for a balanced and informed view of the annuity and income drawdown debate.

  12. There is a fundamental principle at stake here. Whilst retrospective legislation is technically possible in the UK (but not at all under the constitution of the US, or for crimnal matters under EU law, for example), it is a dangerous game to play because it removes certainty, the ability to plan, destroys value, etc.

    How would you decide what laws applied retrospectively and which did not? Orwell’s 1984 provides the ultimate solution I guess – just re-write history whenever it’s convenient or expedient to do so.

    Any common sense examination of the consequences of this type ‘thinking’ gives one sane conclusion…

  13. Surely only those that happen to attain their 75 birthdays are the ones who were forced to buy an annuity. Perhaps I have missed something. If an annuity was right for an under 75 pre the changes who is it suddenly not right.

  14. Well ASPs were available for 75s after Plymouth Brethren denounced annuities as immoral. Every annuity case should have it documented why drawdown was unsuitable. Also it should be noted on file that customers did not mind their money being used to increase the income of strangers after their death rather than go into their estate.

  15. Oh, and one more thing. If I were an IFA with a load of annuity clients I would be arranging a sedia gestatoria for Steve Webb to be carried round the streets of London. Because you can see what happens next. Customer: Do these changes affect me? IFA: No, you have an annuity. Customer: My mate says he has £100 grand in a pension pot. I seem to remember mine was about £90 grand. How come he can get his and I can’t? IFA: You have an annuity. He has a drawdown plan. Customer: Why isn’t mine in a drawdown plan? IFA: The regulator said you need £100 grand so we followed their guidance. Customer: A firm left me a recorded message yesterday saying when you were advised to get an annuity did the adviser mention an option for drawdown? IFA: If you check our suitability report you will see that we mentioned drawdown. We said you shouldn’t be trusted with your own money and we advised you to let an insurance company have your money. They will take much more care of it than you. They will make sure you have an income for life whereas you would have blown all the money getting rid of your mortgage.

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