Opinion  

Anyone in the market for another new pension reform?

Anyone in the market for another new pension reform?

Just when you thought you had seen all the pension reforms one government could offer, along comes Steve Webb with another nifty idea.

The pensions minister’s latest suggestion of allowing pensioners to trade their annuities for cash will no doubt delight many of the 5m or so trapped on low incomes.

Equally, it may well be causing interest in the corridors of insurance firms making tidy profits from annuities.

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It is not yet clear how the pensions minister would like to achieve this particular reform, and it will almost certainly have to wait until after the election. But it is certainly an idea worth debating.

Initially the barriers seem insurmountable. One approach would be to set up a market as with traded endowments.

But who would want to buy one? We are talking about a product offering a relatively low fixed income for an undefined period, once you are beyond any guaranteed payments period. The original annuitant could get run over by a truck tomorrow, or live for 30 more years.

Presumably someone would have to monitor the original annuitant to see when they died. But once the annuity is sold there is no incentive for surviving relatives to bother telling the new owner or the insurer that the annuitant has died.

Setting up a market would also involve fees for a middle man, further reducing the value of the annuity to buyer or seller.

How would the cash lump sum released be treated tax-wise? A large sum released at once could push the pensioner into a higher tax bracket.

Perhaps he would be allowed to move the money back into a pension environment and only pay tax on any income taken.

But for the Treasury and the government, a one-off tax charge when the money is first released could prove too attractive to resist.

Another approach would be for the insurance firm to buy back the annuity. But what is in it for them?

From the pensioner’s point of view this would only work if insurers were forced to work off rates or within ranges laid down by a regulator.

But insurers could legitimately argue that forcing them to buy back annuities at prescribed rates was a step too far in interfering with their businesses.

Would any transaction which involved swapping an annuity for cash necessitate the need for financial advice? I suspect this would depend on the amount of cash involved.

While this would be a welcome change, especially for those pensioners who did not want to buy an annuity in the first place, I fear the complexities and costs would make it very difficult for a mass market scheme to become a reality.

However, Steve Webb has surprised me before, and I sincerely hope he manages to do so again.