Pensions spotlight: Future of annuities

Pensions spotlight: Future of annuities

Get your annuities here! Lovely annuities! Take this £10,000-a-year single life, escalating annuity; healthy male, 72, strong as an ox, could keep going till he’s 100! How much for it?”

Is this the future of the annuities market? It is certainly one possibility envisaged by pensions minister Steve Webb when he mooted the suggestion that annuitants should be given the option to sell their annuity and so join the brave new world of pensions freedom due to start in April. Currently, of course, this is not possible – an annuity purchase is a once-in-a-lifetime, irreversible decision (unless it was made after Mr Webb’s new regime was announced last year). With approximately 6 million annuitants in the UK, a second-hand market could be enormous. But would it offer buyers or sellers a good deal, and would it take off?

As with most issues concerning ‘freedom and choice’ – the government’s catchphrase for its pension reforms – opinion is divided. The split is a clean one between the pensions industry – espousing the view ‘they don’t know what they’re doing’ – and consumer groups, putting forward the ‘let us decide what is best for us’ argument. This split holds across almost all areas of pension reform but is particularly pronounced on the matter of the second-hand annuity market.

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The pensions industry is concerned that with free choice comes the potential for extremely bad decisions. The UK’s reform plans come at a time when more liberal pensions markets – such as those in the US and Australia where hardly anyone buys an annuity – want to boost their annuity markets and so reduce the number of pensioners who run out of money.

Model world

Ironically they have been looking to the UK as a better model – and many local experts are aghast at the thought that the UK wants to copy their model. In Australia, for instance, there is a ‘road trip’ culture. When they retire, pensioners cash in their savings, sell their house, buy motor homes and travel around the country in one big blow-out adventure. It sounds great.

But then they run out of money in their late 70s or 80s and fall back on state support, which isn’t so great. If only there was a guaranteed pension for life that they could buy instead? Like an annuity; less fun, but more sensible.

The second-hand annuity is yet another step towards the Australian model direction. Experts fear that millions of annuitants will be tempted to cash in their £10,000 a year or less annuity. While the lump sum might look massive, actually it would be bought at heavily discounted prices giving the consumer a really bad deal.

As with any financial market, there is always a cost of trading and few pensioners would be better off as a result. Worse still, it would be difficult to know what really is a good deal due to the complex pricing systems used.