Busget 2015: Chancellor George Osborne (pictured) has confrmed that the pension freedoms have been further extended to remove the restrictions on buying and selling existing annuities.
From April 2016, pensioners with an annuity will be able to trade it in without a tax penalty. This means that approximately five million pensions will be able to exchange their existing annuities for cash should they wish.
The legislation is aimed at allowing pensioners to sell on their annuities, with the returns then allowed to be taken as a lump sum or placed into drawdown.
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These freedoms will enable those at or nearing retirement, who have already purchased an annuity, to make their own decisions, and choose how they want to spend their retirement savings.
Currently, people wanting to sell their annuity to a willing buyer face a 55% tax charge, or up to 70% in some cases. The government will remove this, so people will be charged at their marginal rate.
Jeff Lynn, chief executive officer of investment firm Seedrs said:“We welcome today’s Budget announcement that those already in retirement and with an annuity will able to join working people cashing in all or part of their defined contribution (DC) pension when they retire.
“With greater investible capital, those in or approaching retirement will need to diversify their investments and income.”
Steve Groves, chief executive officer of financial solutions organisation Partnership Assurance, added: “The creation of a well-regulated carefully-designed secondhand annuity market could mean that peoples annuities are now more flexible, still guaranteeing an income for life but also able to provide some extra cash when it is needed.
“It will provide those five million older people who have already taken an annuity with a greater degree of flexibility.
“Extending the freedoms to past-annuitants and providing future generations with even more flexibility is simply not good enough unless it has a genuinely positive impact on their lives. This needs to be at the heart of the consultation.”
Care is needed to avoid these new flexibilities being a short term gain at the expense of a long term loss.
The extension of freedoms needs an effective life support system. The common aim must be to assist vulnerable pensioners and employees in making sensible decisions throughout their working lives and beyond.
A challenge will be to ensure that there is a robust guidance and advice regime, of similar weight to the one protecting transfers above £30K from DB to DC schemes, to protect pensioners.
There is also a key role for the pensions industry and employers, working together to help, in particular, today’s pensioners and older employees. There are many potential media, from simplified products and clearer rules, to workplace support, developing and deploying interactive member-focused tools such as retirement modellers incorporating all of an individual’s assets.
The proposals will no doubt focus concerns around the problem of low levels of financial knowledge generally, and of pensions in particular. There is much to be done to improve that, but it is a long-term project.
The pension freedoms give those nearing retirement – and now those who have already bought an annuity – the chance to make their own decisions. It empowers individuals to choose how they want use their retirement savings, something we’ve never had before. However, the removal of restrictions on buying and selling existing annuities could expose yet further people to pension scammers, unless, for instance, the buy-back is restricted to insurance companies. It could also leave people being hit with charges or worse, poorer retirement savings than they had before, by cashing in and making a poor selection without the proper advice.
People already in retirement can now join the pensions freedom party.
Research shows a third of those aged 45 to 64 with a pension would consider accessing these funds to purchase a buy to let property and today’s announcement allows those already retired to follow suit, swapping their annuity for a fixed lump sum they could put into a buy to let investment. Britain’s ranks of ‘silver landlords’ could increase significantly following the change in regulation, which offers more freedom for those in retirement. For some retirees it could be a good way to diversify their investments and income, however, prospective landlords should seek financial advice to ensure they understand the returns and risks of investing in property and especially the tax implications.
With the pension reforms announced in the Budget the Chancellor is clearly appealing to the grey vote. The concern is that he has merely punted the pension risk down the road to be revisited at a future date.
Today’s reforms, while creating additional flexibilities, do little to assist defined-benefit schemes managing record deficits. This has to be the priority of the new government in May.
Security in both work and retirement continues to be of paramount importance. Companies are taking longer term views to make good their shortfalls but those with weaker corporate health are exposing their members to a growing risk that their company might not be there to fund full benefits.
Risk is building up in the defined benefit landscape that this Budget simply doesn’t address.
Now that members with annuities in payment have access to the new flexibility, the next obvious question is should this be allowed for defined benefit pensioners as well?
At the moment, DB members need to transfer their benefits to a defined contribution (DC) scheme in order to access the flexibility – and current legislation makes this nigh on impossible for DB pensioners. We know that the Government is intending to consult on whether members should be able to access their benefits directly from a DB scheme, so this provides an ideal opportunity to provide more flexibility for DB pensioners.
There are a number of options which could provide DB pensioner members with more flexibility. This could start with providing members with the right to transfer their benefits out of the scheme. As a middle ground it would be possible to allow members to ‘cash out’ the value of the future pension increases. This would ensure that members are left with a minimum level of secure income. It would also provide some protection for trustees and scheme sponsors from the selection risk – (where members in poor health would be most interested in transferring assets out) – which this would introduce.
However, the key to this – as with any option – is to make sure that members can make a genuinely informed decision – so provision of independent financial advice will be vital.
This initiative is long overdue given that interest – and therefore annuity – rates have been at all-time lows for a record time. It is a fantastic opportunity for those who bought an annuity when it was not their preferred route to seek financial alternatives that are more suitable to their circumstances, including the paying down of debt.
Annuity sellers could get significant value but a lot will depend on age and health factors. There will be a lot of people who will not be able to achieve the value they want from selling their annuities.
Tax treatment will need to be clarified. For example, how will the capital gain for annuitants be taxed and how will the income streams for the new beneficiaries be treated given it will be less than the price paid for some time? Regulators will also have to draft new rules to cover transferability rules.
For many annuity sellers it will be a complicated process though and therefore there will be significantly more demand for financial advice.
It’s estimated that five million pensioners could take up this option. However, it remains to be seen who will purchase these annuities – and indeed how much they would be willing to pay for them.
The government is inviting views on how best to help people make an informed decision. If this leads to a requirement for advice similar to what will soon apply to “defined benefit to defined contribution” transfers, then this is likely to lead to a bottle-neck if the option proves popular.
The Chancellor said that pensioner poverty at its lowest level ever. We need to ask the question, what will pensioner poverty look like in years to come given those age 55+ will be able to start spending their pension savings from next month, and the announcement today that existing pensioners will be able to sell their annuities.
Annuities have had a bad press. The reality is if you’re looking for a guaranteed lifelong income they are impossible to beat. We need to remember that men underestimate how long they will live for by 5 years and women by 8 years. There’s a very real danger people will run out of money at some point in retirement if more guidance and support isn’t put in place, starting at age 55 and lasting through to the end of life. Online tools will be the best way to deliver that support.
Building on the major retirement reforms announced in last year’s Budget, the Chancellor has today confirmed that the Government will extend the new retirement freedoms to around 5 million people who have already bought an annuity. From April 2016, pensioners will be able to sell the income they receive from their annuity and have the option of then using the capital to take a lump sum or place it into a drawdown facility.
In order to make this vision a reality, the Government will launch a new consultation on the steps required to establish a new market for selling and buying annuities in this way. Further work will also be undertaken by the Financial Conduct Authority to put in place appropriate guidance and protections for those individuals considering selling their annuities in this way. It will be interesting to see how these measures unfold over the coming months and the degree of interest they generate both at consumer and market level.
This clearly fits with this Government’s agenda for pensions, but it’s unclear how savers will be protected. We welcome the full consultation as it will be essential to ensuring a fair and balanced market.
It’s vital this does not distract us from or undermine the Freedom & Choice pension reforms due to begin in 19 working days. The Government must make sure this doesn’t divert focus or resource from Pension Wise, damage the broader annuity market or slow down the development of a much-needed market in retirement solutions for those looking to make use of Freedom and Choice from next month.
Duncan Buchanan, President of the Society of Pension Professionals (SPP) and Partner at Hogan Lovells commented:
For the second year in a row the Chancellor has announced a major change to pensions but unlike last year’s “freedom and choice” changes, which came as a big surprise, this year there was no rabbit in the hat.
Pensioners’ ability to sell their pension income to a third party will be welcomed by older voters but as with any change to pensions the devil will be in the detail. The industry will have to wait for the outcome of the Government’s consultation paper before they can start to adapt to this brave new world. The fear has always been and continues to be that people will run out of money in later life and then regret their decision.
The new pension freedoms are already immensely popular and extending these to those already in retirement makes a lot of sense. The bird in the hand option of cashing in an annuity will be attractive to many. However there are significant practical obstacles to overcome before this option will be available and in most cases we would expect the guaranteed income an annuity provides to have a greater lifetime value than a cash payment now.
The Government claim that 5 million existing annuity holders will benefit from the freedom to exchange their annuity for a cash sum needs to be put into context. It is not at clear that such a scheme can be built and even if it is, it will only benefit a small minority. For most people it will probably make sense to retain their existing secure annuity income.
By far the biggest announcement on pensions was confirmation that the government has launched a consultation on how a market may be established for people to trade in their future annuity income. The proposal would extend this year’s retirement freedoms to over 5m existing annuitants from April 2016. However, the consultation document provides an insight into the many complex issues involved in making this a reality; including taxation, underwriting, valuation and administration. It also raises the question of whether advice would need to be mandated, given the obvious parallels with those wishing to transfer out of DB pensions.
It is clear that the government is concerned that there is a real possibility of consumer detriment for which adequate guidance and protection arrangements have to be in place if this is to be avoided or at least minimised. Whether Pensions Wise has or will have the capacity to deal with this extra task is debateable, and much will depend on how the new service develops throughout the coming financial year. At this point in time regulated advice, although clearly desirable, might be too expensive for many people. Risk warnings from pension firms will therefore be essential in addition to the other methods proposed.
It is interesting to note that in order to protect the taxpayer, the government does not intend to compensate individuals through welfare for any loss of income resulting from assigning their annuity to a third party and would therefore like to consider whether those receiving means-tested benefits should be able to do so. This could be a particularly confusing area for benefit claimants who might find their benefits withdrawn or reduced for a period of time on receiving the lump sum from the annuity exchange and then subsequently being able to secure an increased rate of pension credit (for example) in consequence of the loss of an annuity as a regular form of income.
I’ve got a feeling that although there will undoubtedly be some people who could benefit from exchanging their annuity for cash, the likely poor deals on offer and the complexity involved may make this new extension of the freedoms unsuitable for the majority of existing annuitants.
Extending the new pensions flexibility to the five million people who have already bought annuities, by allowing them to sell the income they receive for a cash sum is not without complications and will further drive the need for financial education and advice. It would concern me if this measure makes people think that annuities are suddenly a throw-away product they can buy and sell at will, as there are likely to be significant transactional costs and taxes to pay. In the Chancellors own words ‘guidance and advice’ will be needed
We welcome the chancellor’s decision to extend the ‘pension freedoms’ to people who have already bought an annuity from 2016, and agree that all employees should be granted greater flexibility with their savings and to fund their retirement as they see fit.
However, as options broaden, more opportunities for bad choices arise. The Government must, therefore, ensure that these further amendments – announced at what is already a time of unprecedented change to the pensions market – are communicated clearly and that the guidance guarantee is able to support the 6 million annuity holders who may now have complex questions to answer.
With auto-enrolment bringing everyone into workplace pensions, it is now more important than ever for the Government to ensure companies are better educated so that they can support employees – faced with an ever-growing list of retirement options – to make that critical personal pensions decision.
Between April 2015 and January 2017, approximately 598,000 UK businesses will stage, representing the largest group of companies to auto-enrol to date and this represents a great opportunity to use the workplace as the route to deliver better understanding to ensure people make the best use of the freedoms they now have.
This is good news but potential traps lie in the detail. The lump sum will be taxed at an individual’s ‘marginal rate’1, and there might also be an adverse impact on means-tested benefits2.
These problems are likely to be compounded by a complex investment decision on what value the pensioner will achieve for cashing in their annuity. Annuitants could face a potential double whammy of poor value – if, for example, they were in good health when they took out the annuity (and didn’t qualify for higher ‘impaired life’ rates) but now are in poor health and as such the would-be third party purchaser of their annuity may not pay much for it. This means those looking to cash in on their annuity could be disappointed as they may have thought they would get back most of their original pension pot, less the amount paid out to date.
Those considering cashing in an annuity will need careful guidance, both as to the investment decision facing them and the tax and welfare benefits impacts. We are extremely concerned as to whether the Pension Wise service will be able to cope with these additional complexities and that many a pensioner may rush into a minefield in their eagerness to cash in what they see as a previously poor value investment.
Although there is a year before introduction of the new rules, this is a short timescale in which to introduce this further change. It is therefore welcome that there is already a Call for Evidence in progress to establish the issues, meaning that the General Election and civil service ‘Purdah’ over the coming weeks should not unduly delay matters.
We will look forward to being involved in this consultation, to ensure that those on low incomes are safeguarded as far as possible.”