The Treasury has taken the decision to abandon its plans that would have allowed pensioners to raise money by selling their annuities.
Insurers have generally reacted with overwhelming relief, with the Association of British Insurers (ABI) labelling it “the right decision”.
The plan had sparked fears that there may be another mis-selling scandal with the government admitting that pensioners might be lured into selling annuities – an income for life – in exchange for a lump sum. The previous Chancellor indicated that the plans would extend pension freedoms and provide those with defined contribution pensions complete freedom to use them as they wish from age 55.
“All the signs were the secondary annuity market would have been a pension freedom too far,” said Steven Cameron, Aegon’s pensions director in comments to
Insurance Business. “Giving up a guaranteed income for life is a huge decision and while a small minority of people might have benefitted, this would not have been right for the vast majority, opening them up to making decisions they might later regret. Both the Government and the FCA openly accepted this.
“The existing pension freedoms are very positive, but also place new responsibilities and hence risks on individuals. Having freedom to take as much or as little income from your pension fund whenever you like after age 55 creates risks of running out of money unless you lock into some form of guarantee. The secondary annuity market added further risks including realising too late you needed the income, getting a poor deal from a third party purchaser, being scammed or finding you had disqualified yourself from means tested benefits by spending the lump sum and leaving nothing to live off.”
The general consensus is that most people would be better off sticking with their existing annuities.
“This was always going to be a temporary market for those who already have annuities,” added Cameron. “Going forward no one will be forced to buy an annuity, although it will still be an option. Income drawdown will provide much more flexibility. But for those who still want some security, income drawdown can now be purchased with an element of guarantee built in.
“The Treasury highlighted uncertainty over who would buy secondary annuities. There was also a huge uncertainty over whether advisers would have been prepared to enter this new, risky market with a disproportionate number of elderly and vulnerable customers. Before advisers would have been prepared to offer advice, they would have needed reassurance of what the regulator and the ombudsman expected from advice to avoid any risk of being criticised in hindsight.”
However, not everyone agreed that the turnaround was the right step.
Speaking to the BBC, former pensions minister Ros Altmann commented that it was a missed opportunity stating “it will be disappointing to tens of thousands of people who bought an annuity they didn’t want and didn’t need.”
In addition, Steve Webb, who was the pensions minister when the pensions freedoms idea was introduced, noted that the government had not handled the issue well.
“If you’ve got an annuity to sell, it’s very hard to work out what it's worth if you’re a member of the public,” he told the BBC.
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