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 using the generous guaranteed rate which was offered when the product was sold. Across the industry roughly 3 in 5 policyholders with these guarantees are surrendering them because they prefer to withdraw their capital rather than buy an annuity.
In order to protect these customers, Royal London has decided to give them the option of exchanging the guaranteed annuity rates attached to these policies with a substantial cash uplift. The amount 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 range 40-80%. Customers who wish to retain the guarantee will be free to opt to do so.
A range of consumer safeguards have been in place throughout this process, including the appointment of an independent actuary to oversee the calculations and an initial round of contacts with affected policyholders to test appetite for the process. Nearly 4 in 5 policyholders affected who responded to the initial mailing said that they wanted the company to proceed with the offer.
Now that the High Court has approved the plans in principle, affected policyholders will receive individualised mailings letting them know the amount by which their pension fund could be increased. A free guidance line is being set up 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.
Policyholders who do not choose to keep their guaranteed annuity rate will have the opportunity to vote on these proposals before a final court hearing in November to sign off the process. Affected policies will be uplifted in December 2018.
Commenting, Steve Webb, Director of Policy at Royal London said: ‘The High Court’s decision is a welcome step forward in the process of looking after our former Scottish Life customers who hold these Guaranteed Annuity Rate products. We have been increasingly concerned to see the proportion of them 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.’
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