Pension freedoms extended to annuity holders

After the chancellor announced the creation of a secondary annuity market in the 2015 Budget, the retirement director for Fidelity Worldwide Investment warned: “It might make existing insurers quite cautious about what is going to happen.”

He said the document, Creating a Secondary Annuity Market, condemned itself, and the proposals might deliver poor value.

However, Mr Higham added that the proposals gave life companies a way out. He said: “A zombie company could always say no – meaning the whole idea of creating a secondary annuity market could be stillborn, as the company has an unfettered right to say no.

“Zombies will have to get the consent of all relevant holders of the annuities and they will have to upgrade their systems. They may also get the blame if something goes wrong. Therefore, existing insurers may be quite cautious about what is going to happen.”

According to chancellor George Osborne, holders of annuities will be allowed to cash them in with a consultation launched also to look at the viability of a second-hand market, giving people the freedom to draw on their money as they choose.

The document, issued jointly with the DWP, also states that individuals should take advice from a regulated financial adviser.

Mark Wood, chief executive of JLT employee benefits, said allowing annuities to be traded could be detrimental to future annuitants.

John Fox, director of Liberty Sipp, said: “We should not expect the annuity companies to offer great value if they are forced to buy their annuities back. Pensioners were punished on the way in and are just as likely to be punished on the way out.”

Other firms, including Prudential and Partnership, welcomed the consultation but warned that the government should ensure that changes were workable and people adequately protected.

Steven Cameron, Aegon UK’s regulatory strategy director, said: “Anyone turning future annuity income into cash is giving up a guaranteed flow of income. Swapping this for a lump sum is a complex and risky decision and specialist advice would be essential.”

Meanwhile, the 124-page Budget document revealed that additional funding of £19.5m would be provided in 2015/2016 to support the pension freedoms and the guidance service Pension Wise. It said: “This funding will extend the availability of state pension statement and pension tracing services. It will also provide for extra delivery capacity for Pension Wise: the government has put plans in place in case there is a need to draw on DWP resources to help manage any initial spike in demand for the service.”

Adviser View

Nick Evans, financial planner at Hertfordshire-based One Life Wealth Planning, said: “This is great news for holders who may have felt there was no viable alternate option when they drew their pension benefits.”

Creating a secondary annuity market: How the government envisages it would work

ORIGINAL PROVIDER → annuity payments paid to a third party → THIRD PARTY BUYER

ORIGINAL PROVIDER → existing annuity payments to customer cease → CUSTOMER

THIRD PARTY BUYER → cash lump-sum, flexi-access drawdown fund or flexible annuity → CUSTOMER

Source: HMT