“There have been mixed reactions to the Treasury’s decision to scrap plans which would have allowed those with existing annuities to sell future instalments for a lump sum. The previous Chancellor positioned these plans as extending the pension freedoms introduced in April 2015, which provide those with defined contribution pensions complete freedom to use them as they wish from age 55. The secondary annuity market would have offered those with existing annuities similar freedoms but they also created many risks which could have led to individuals ending up worse off. While it seems odd to argue against ‘freedoms’, sometimes these come at huge personal risk and it’s the Government’s job to set policies which work for the greater good.
“All the signs were the secondary annuity market would have been a pension freedom too far. Giving up a guaranteed income for life is a huge decision and while a small minority of people might have benefitted, this would not have been right for the vast majority, opening them up to making decisions they might later regret. Both the Government and the FCA openly accepted this.
“The existing pension freedoms are very positive, but also place new responsibilities and hence risks on individuals. Having freedom to take as much or as little income from your pension fund whenever you like after age 55 creates risks of running out of money unless you lock into some form of guarantee. The secondary annuity market added further risks including realising too late you needed the income, getting a poor deal from a third party purchaser, being scammed or finding you had disqualified yourself from means tested benefits by spending the lump sum and leaving nothing to live off.
“Some individuals will be understandably disappointed. Some who already have a secure income, perhaps from a defined benefit pension, might have been attracted to selling an unneeded future flow of annuity income for a lump sum, even after taking an income tax hit. But many others who might have initially been attracted to this could have lost out or been disappointed once they found out what was on offer.
“One group who might have been disappointed are those in poor health, with low life expectancy, who might have thought selling their annuity would have generated a better return. But in reality they would have had to provide verifiable medical evidence, possibly after a health assessment, and the poorer their health the less they would have been offered by any third party purchaser.
“This was always going to be a temporary market for those who already have annuities. Going forward no one will be forced to buy an annuity, although it will still be an option. Income drawdown will provide much more flexibility. But for those who still want some security, income drawdown can now be purchased with an element of guarantee built in.
“The Treasury highlighted uncertainty over who would buy secondary annuities. There was also a huge uncertainty over whether advisers would have been prepared to enter this new, risky market with a disproportionate number of elderly and vulnerable customers. Before advisers would have been prepared to offer advice, they would have needed reassurance of what the regulator and the ombudsman expected from advice to avoid any risk of being criticised in hindsight.
“So while the secondary annuity market might have looked like a good idea, as soon as you looked at the detail, there were 101 questions around how it could be made to work well for consumers. We are pleased that the Government has listened to widespread concerns and done the right thing. Once you’ve set out in a particular direction, it's never easy to make U-turn but sometimes it is the right decision to make to get back on track.”
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