Retirees in poor health may have had their hopes dashed when the government scrapped plans for a secondary annuities market. However, advisers view the U-turn as an important measure against pension scams and poor client outcomes.
The proposal to let people who have an annuity exchange it for a cash lump sum has been widely criticised ever since it was announced by the government in March 2015.
After a lengthy consultation with providers, regulators and consumer groups, ministers came to the conclusion that a lack of competition meant customers were unlikely to get good value for money.
AJ Bell senior analyst Tom Selby said a secondary annuities market would have been stacked in favour of the buyer and posed risks to savers “who could have seen the value of their pot ravaged by charges”.
The majority of advisers appear to agree, as this month’s Inquiry found out. When asked whether the freedom to give up a guaranteed income for life would have been a step too far, more than half (52%) said ‘yes’. A third (33%) answered ‘no’ and 15% were unsure (see chart 1, below).
Consumer detriment
One adviser branded the initial proposal as a “crazy idea, which would have given a poor client outcome”. Another said: “It’s unlikely the deal to buy back an annuity will offer good value. Annuity rates have fallen significantly since pension freedom, therefore many will be better off with the deal they have now than if they bought the annuity today.”
Several readers were concerned that people with short-term financial problems could have tried to fix these to the detriment of their longer term income.
One said: “Individuals’ financial situations eight years after the near-implosion of the banking system mean that reserves for the majority are at an all-time low. The prospect of swapping a lifelong income to fix other financial issues may be too much of a temptation for many.”
Of the sizeable third who answered ‘no’, some said allowing a secondary annuities market would have been a logical extension of pension freedom. Several thought that if advice was taken, selling an annuity could have benefited some individuals.
One reader was looking forward to switching part of their own annuity into a flexible drawdown product: “I recognise that there would be a financial penalty from doing this, but would have accepted this. I accept all the points about lack of a market, scams and so on, but cannot understand why there should not be an option to deal directly with the insurance companies who sold the annuity.
“There is obviously a lot of actuarial issues which are beyond my comprehension, which means that insurance companies will no doubt say makes such a move impossible.
“But if they have the money which I gave them earmarked in their books for me, why can it not be reallocated to another pension product such as a flexible drawdown plan?”
Pension scams
Many experts in the industry also warned that allowing a secondary annuities market would result in fraudsters targeting vulnerable retirees. The City of London Police recently reported a 25% jump in the amount of money lost to fraud since pension freedom was introduced in April. In total, about £13.3m has been lost.
More than three quarters (77%) of RP readers agreed that a secondary annuities market would have increased the risk of pension scams, while 13% disagreed and 10% were unsure (see chart 2, above). Several advisers suggested the spike in scams would be similar to that seen after pension freedom, with one saying lump sum transfers “are a target for unscrupulous firms”.
Another adviser said: “Until pension advice (including the set-up of SIPPs) is fully regulated and controlled, there is always the danger that non-authorised salesmen will try to extract pension savings into dubious investments.”
Although the industry as a whole has welcomed the government’s U-turn, many have suggested retirees in poor health will lose out as a result.
RP asked them if they thought many clients will be disappointed by the decision (for example, people who already have a secure income, are in poor health or receive minimal income from annuities). Nearly half (49%) said ‘yes’, 30% said ‘no’ and 21% were unsure (see chart 3, below).
Dashed hopes
One reader was personally “disappointed and particularly angry that the government built up our hopes for so long only to have them dashed months before the market was due to be up and running”.
Although some clients could be disappointed, selling their annuities would not necessarily have been the right decision.
As Aegon pensions director Steven Cameron pointed out, people in poor health would have had to provide verifiable medical evidence (possibly after a health assessment) and the poorer their health, the less they would have been offered by any third-party purchaser.
One reader agreed, saying if a person in poor health sold their annuity, it would “doubtless lead to poor value”. He said the only person who could have considered the move would be a client with other secure and substantial income.
Alth-ough plans for a secondary annuities market have been cancelled, many people in the industry think other changes are afoot – either in the Autumn Statement or the 2017 Budget. When asked what the government’s next change to pensions could be, 37% said the introduction of a flat rate tax relief, 28% cited the scrapping of higher rate tax relief, 9% thought pensions and ISAs could be merged, and 26% were unsure (see chart 4, below).
Of those in favour of introducing a flat rate tax relief, one reader said this option would keep things simple, adding: “Since pension simplification, the rules and regulations have just got more and more complicated.”
Another reader suggested it is only a matter of time before higher rate relief goes, and said this could be combined with the introduction of a flat rate.
Of the advisers who were unsure, some were hopeful that the lifetime allowance will be increased or removed altogether. Others also want the annual allowance to be increased.
“Restricting both is illogical and puts defined contribution savers in a detrimental position compared to defined benefit members,” one reader stated.
Some advisers are hopeful there won’t be any further changes and that the industry will enter a period of stability. But one warned: “They have proved it is not a good idea to try to second-guess them.”
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