Millions of pensioners could benefit from the latest proposal which could see the creation of a “second-hand” pensions market, as retirees exchange their annual lifetime incomes for a cash lump sum.
Pensions minister Steve Webb said in an interview with The Telegraph that pension companies and insurers had shown “considerable interest and enthusiasm” for the plan.
Webb floated the idea following concerns that those five million people already tied into an annuity contract would miss out on new pension flexibility announced in last year’s Budget and given the royal seal of approval in June.
The UK pension reforms are designed to give retirees flexible access to their pension pots. Since the announcement sales of annuity products have slipped considerably, as retirees wait for the reforms to come into force in April.
Webb said “no one would be obliged” to sell their policies, “but for those who would prefer up-front capital to regular income, I can see no reason why this should not be an option”.
“Sceptical”
Head of pensions research at Hargreaves Lansdown, Tom McPhail, said he doesn’t think the latest idea will work, and compared it to funds which invested in life insurance contracts which were dubbed “high-risk” and “toxic” by the then Financial Services Authority in November 2011.
“Individuals will not buy second-hand annuities off other individuals because they don’t have the actuarial and longevity assessment skills necessary to undertake such a transaction,” he said.
“Purchasers of second-hand annuities would probably look to buy a portfolio of investments rather than a single transaction in order to spread risk. This would therefore require the establishment of pooled funds for these contracts, which we think this is unlikely to be an attractive commercial undertaking.”
He outlined two ways in which pensions could be sold: the first where the investor is paid a lump sum by their annuity provider after the cancellation of their contract, and the second where the income stream is sold to a third party in exchange for a lump sum.
“Although the first option is the simplest solution,” he said. “It depends upon the annuity company and the investor both being able to agree a fair price for the cancellation.”
He argues that investors in poor health would try to cash in their annuities, leaving insurers with only the healthy long-lived investors, which is “good for the annuity holder but bad for the solvency of the insurer”.
“I am sceptical that the first option would get off the ground at all,” said McPhail. “If you are going to develop these kinds of pensions you have to commit capital. You either do it or you don’t.
“I don’t expect insurers will be interested in going down that road.”
Anxiety
Karen Barrett, chief executive of unbiased.co.uk, said the latest proposals do not resolve anxiety about retirement plans.
She said: “One inherent risk of giving people a ‘choice’ to do something is that some individuals may interpret this as a recommendation of what they should be doing, without understanding how this meets their retirement goals.”
“Annuities are a dead end”
Managing director of Geeson Financial Services, Chris Geeson, said: “Annuities are a dead end but they also represent a lot of known situations.
“I wonder if this proposal is in the interest of the public, or whether it’s really about money going into the tax coffers.
“At the moment I’m staying on the fence when it comes to providing advice to clients about annuities,” added Geeson. “I don’t think we can advise on this until it is law and until we know who the next political leader is.
“Politics should never have been allowed to get involved with pensions, but it is now, and will dictate whether this proposal becomes a reality or not.”
