Why allowing people to unlock annuities makes sense
by Dr. Ros Altmann
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Millions forced to buy unwanted annuities would now have an option to cash in if they need to
Nobody will be forced to sell their annuity back, but they can if they need or want to
The proposals to allow people to cash-in annuities that they were forced to buy under the old pension rules could prove popular for many of those who have unwanted or low value annuities. Millions of people previously had no choice and had to buy an annuity with their pension savings, even if they didn’t want to. The old rules, which have now been swept away, meant that anyone without a very large pension fund, had no other option apart from annuity purchase if they wanted to access their pension.
Who would benefit?
People who purchased an annuity because they had no choice, but need the money now to repay debts, or pay for health or care needs, or other urgent spending
People who have other pensions and for whom the annuity is not an important source of their retirement income
People who purchased small annuities, for whom the small amount of ongoing income will make little difference to their standard of living in retirement. For example, someone with a £5,000 pension fund who bought an annuity at age 60 might have less than £5 a week for life, whereas having a few thousand pounds straight away could make a real difference to their lives.
What are the risks?
There are risks that people will be offered very poor value and charged unfairly high sums to cash-in their annuity. Of course, they won’t be forced to sell it, it will be their choice and if there are a few companies bidding for their annuity this may help improve the value offered.
There are risks that people will be enticed into selling back their annuity and later regret it. This risk is the same as exists under the new pension rules, where people do not have to buy an annuity in the first place. It is not a reason to deny the opportunity to those who were forced to buy an unwanted annuity in the past.
There are risks that people will cash in their annuity, spend all their money and then have to live on state benefits as they become poor in retirement. This risk is no different to that which exists under the new pension rules and it just helps remove some of the unfairness between the past and the future.
Many of these people have written to me complaining that they didn’t want or need an annuity and would much rather have a cash lump sum to spend as they wish, rather than an income for life that has no inflation protection.
For those people who have annuitised relatively small sums, the amount of income they receive from their annuity will be very small, especially as annuity rates have plummeted in recent years. Yet, if they wanted to take their tax-free cash, they had to take an annuity with the remainder.
Many people bought unsuitable annuity products, or bought an annuity that does not cover their partner and, especially those with large debts to repay or in need of a lump sum for essential expenses, the opportunity to get money back rather than just taking an income will be a welcome option to consider.
Even if these proposals go ahead, nobody will be forced to sell their annuity, it will be up to them. But the reason this policy is right is that it would give people an option that they have never had before. Until the Budget pension changes, people who bought an annuity were stuck for life. If they had bought an annuity they didn’t need, or the wrong type of annuity, it was just hard luck, they were stuck.
I have heard from so many people who are furious that they had to buy their annuity in the past couple of years, whereas if they had been younger the new rules would have meant they could have avoided locking all their pension savings into a product they did not want.
Of course there are risks with such an option being offered. People would be swapping a guaranteed lifetime income for a pot of money today that they could spend. They will therefore not have that income in future years. However, they will not be forced to cash in, it is just an option they would have that they have been denied up till now. The guaranteed income is not normally inflation linked, so its value will erode over time and if people have other pensions elsewhere, they may feel it is more sensible to have some cash instead.
If someone has become very ill and is unlikely to live long, or needs to pay for care, they might find a lump sum more useful, even if it is much less than their original pension.
Of course, insurance companies would charge to buy back the annuity income, the cash-in value would be less than original pension and would depend on assessments of health and life expectancy. However, as nobody is forced to sell their annuity, it is just an option for them, this is not a reason to deny them the chance to change their product. They should be required or encouraged to take independent financial advice to explain the risks of re-selling and help them find a good rate, but if they still believe this is what is best for them, they would then have the chance to undo their unwanted purchase.
Overall, this is an idea worth pursuing and could help so many people who are currently stuck in an annuity that they never wanted to buy. It is only an option, and unlike the past rules which forced people to lock their pension savings into a potentially unsuitable or poor value product that did not meet their needs, it gives them the chance to choose what they want to do. As people will be able to do in the new pension regime.