The consultation to lay the groundwork for a secondary market for annuities, announced in last week’s Budget speech, will allowaround 5m pensioners having the option to cash in the products in exchange for a lump sum.
If a framework for the market can be agreed, the changes will come into play next year. Chancellor George Osborne said in his speech on Wednesday: “For many, an annuity is the right product, but for some it makes sense to access their annuity now. So we’re changing the law to make that possible.”
Bob Scott, senior partner at consultancy LCP, said the move was “pure electioneering”.
“It is designed to appeal to those holders who have been forced to buy an annuity they didn’t want. In many cases, they may be keen to release the remainder of their pot,” Scott said. “Throw in the risk of fraudsters targeting vulnerable people and the potential for a mis-selling scandal is high.”
He added: “Building in adequate protections for consumers is an essential prerequisite to such a scheme getting off the ground.”
People that bought annuities a few years ago when interest rates were high may get a pleasant surprise when they get a valuation. Their annuity in today’s money will have risen in value
Kenny Nicoll, Redington
Kenny Nicoll, a director in the manager research team at consultancy Redington, said the move, coupled with existing reforms removing the requirement to buy an annuity, risks the public viewing annuity products as no longer suitable for a retirement income.
However, he said cashing in could appeal if rates have fallen relative to the interest rate when the annuity was purchased.
“People that bought annuities a few years ago when interest rates were high may get a pleasant surprise when they get a valuation. Their annuity in today’s money will have risen in value,” Nicoll said.
Adviser Portal Financial carried out a survey in March of 1,000 retired and non-retired respondents, which found 569 would consider selling their annuity.
Of those, 50 per cent would do so because the value of their annuity was too small, while 22 per cent would want to use the lump sum for a ‘significant purchase’.
However, around two-thirds (65 per cent) would expect to receive 90 per cent of the annuity’s value in exchange for surrendering.
Gareth Connolly, chair of the pensions board at the Institute and Faculty of Actuaries, said while the body welcomes the consultation to give pension savers further flexibility, it would prefer if any further changes were delayed until “way after” the current round of reforms have bedded in.
“I would hope that is conditional on the April 2015 changes being implemented in a way that’s robust,” he said.
