Pensions minister proposes re-sale of annuities
The pensions minister Steve Webb has proposed that pensioners with existing annuities should be allowed to sell them in exchange for a cash lump sum.
It comes after a series of pensions reforms - due to be introduced in April 2015 - aimed at people approaching retirement.
In an interview with the Sunday Telegraph, Webb said he is concerned that the forthcoming reforms omit people who have already retired, who will not enjoy the same freedoms as those set to retire imminently.
His solution is that retirees should be able to sell their annuity contract to the highest bidder, in return for a cash lump sum. This would allow retirees to manage their pension cash in a way they believe will provide them with the highest income.
They could, for example, invest the cash and draw an income from it. Or they might invest some of their cash and part-annuitise the rest – giving them the same options that will be available to those due to retire from April 2015.
Webb told the paper: "I want to see people trusted with their own money wherever possible. I have already heard from people around the country who would like to see this change made.
"I want to see if we can get these freedoms extended to those who are receiving an annuity but who might prefer a cash lump sum. No-one would be obliged to do so, but for those who would prefer up-front capital to regular income, I can see no reason why this should not be an option."
The move would suit, in particular, people with lots of pensions pots who would prefer to trade the smallest of them for lump sums rather than continue receiving a number of tiny, annuitised payments.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said the reform would be a vote-winner but is unlikely to ever work.
He explained: "There is an obvious appeal in finding a way to extend the pension freedoms to existing annuity holders, giving them the option to take their money back as a lump sum if they want. There is overwhelming support for the new pension rules and with an election looming, unlocking these existing contracts would be a vote winner.
"It is to the government's credit that they are continuing to seek new ways to reinvigorate the retirement savings sector and to encourage investors to take control of their own money; we just don't think this latest idea will ever work. Similar schemes using life insurance contracts in the past were labelled by the Financial Services Authority as 'high risk, toxic products.'"
McPhail suggested there were two ways the government could introduce such reforms. The simplest is a system where the annuity holder and insurance company agree to cancel the contract and the investor is paid a lump sum by the annuity provider. However, this depends on both parties agreeing to a fair price.
Alternatively, a second option would be to allow annuity holders to sell their policy to a third party in exchange for a lump sum - similar to the way "life settlements" work in the US.
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Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.