The announcement by the chancellor in his March 2015 Budget that people will be able to sell their annuities for cash has sharply divided opinions.
Some see this as a natural extension of the April 2015 ‘freedom and choice’ agenda – if future pensioners can choose the mix of capital and income they want, why should existing pensioners be deprived of the same choice? But others fear that the complexity of valuing annuities and the risk of the ‘wrong people’ selling up could create just the sort of scandal that the financial services industry needs like a hole in the head. So who should we believe?
At heart, this is more of a philosophical question than a technical one. If a government can create a freedom which some people will use to their advantage but which might allow others to make poor choices, should it go ahead? For me, the key question is whether an appropriate level of consumer protection can be applied which will not be so onerous as to kill the market, but sufficient to make sure vulnerable – or misguided – people are not exploited.
So what would such a regime look like?
First, it is necessary to think about people who almost certainly should not sell their annuities. One such group is those on means-tested benefits such as pension credit or housing benefit. By definition, this group has so little regular income relative to their needs that the taxpayer is topping it up. It is very hard to see that this group should be going around sacrificing current income, even in return for a capital lump sum.
Indeed, people on low incomes could end up in the worst of all worlds if they are not careful. If someone sells an annuity and then renews his housing benefit claim, the local authority might well ask why their income has fallen. If he explains he has willingly chosen to surrender his income, the council may judge him to have done so deliberately in order to qualify for additional benefits and ‘deem’ him still to be in receipt of that income. This could make things very tight indeed.
Worse still, any capital sum received from selling an annuity would count as capital when someone is next assessed for benefit and could lead to him being disqualified from help altogether.
In the absence of a blanket ban on those on means-tested benefits selling their annuities, there needs to be a requirement for annuity buyers to ask if the seller is on benefits. If the answer is yes then at the very least the seller needs to demonstrate that the consequences of his actions have been fully explained to him, ideally by a financial adviser or, failing that, by a session on the phone with PensionWise.
Another concern that has been expressed is that sellers will not know the ‘true’ value of their annuity and might as a result get a poor outcome.