The High Court has approved Royal London’s plan to offer clients a bonus to trade in their guaranteed annuity rates (Gar).
The pension provider had a court hearing on 25 June to consider the option, which will allow about 30,000 customers, with Scottish Life pension products, to swap their Gars for a lump sum greater than they would ordinarily have got.
The latest court approval has been an approval 'in principle', meaning it is the first stepping stone towards creating the offer but not the final decision.
Policyholders who do not choose to keep their guaranteed annuity rate will have the opportunity to vote on the proposals before a final court hearing in November to sign off the process.
Affected policies will be uplifted in December 2018, the firm stated.
Sir Steve Webb, director of policy at Royal London, said the High Court’s decision was a welcome step forward in this process.
The former pensions minister, who will be speaking at The Great Pensions Debate conference in Port Talbot today (10 July), said: “We have been increasingly concerned to see the proportion of [clients] throwing away these valuable guarantees since the introduction of pension freedoms.
“With the uplift that we are offering, customers will be able to retain the value of the guarantees attached to their policies whilst also enjoying the flexibility of pension freedoms.
“And those customers who want to keep their guaranteed annuity rate option will be free to do so.”
Since pension freedoms were introduced in 2015, pension providers have seen a big increase in the number of customers choosing to take their pension savings as cash rather than buying an annuity on the guaranteed rate which was offered when the product was sold, Royal London said.
The provider said roughly three in five policyholders with these guarantees are surrendering them because they prefer to withdraw their capital.
In order to protect these customers, Royal London decided to offer them a more generous exchange package, including a cash uplift.
The size of the uplift will depend on the terms of the individual policy and when it was taken out, but most uplifts are expected to be in the 40-80 per cent range.
Customers who wish to retain the guarantee will be free to do so, the provider noted.
Royal London first floated the idea in March when it wrote to its customers asking them whether they would be interested in the offer.
It said responses had been “overwhelmingly positive”, with about five in six wanting it to proceed.
Royal London said it had put in place a range of consumer safeguards throughout the process, including the appointment of an independent actuary to oversee the calculations.
The provider is also setting up a free guidance line to answer questions about the process, and Royal London will “also make a substantial contribution towards the costs of personalised financial advice to help policyholders decide the option which is right for them”.