A few days ago, the government reversed its decision to allow pensioners to sell back annuities that they were forced to buy due to past restrictions. I firmly believe that this U-turn is wrong.
When people buy an annuity, they hand over their pension savings to an insurance company in exchange for an income for the rest of their life. Until 2015, people were often forced to buy annuities as a result of restrictive pension rules, which have now been relaxed. Many people would not have purchased an annuity if they did not have to, and some may have bought the wrong type for their needs. Having been promised the chance to exchange the income for a cash lump sum, thousands of people will now feel dreadfully let down, and may be stuck with a product that is of little value to them.
Annuities can be excellent if customers buy the right type, at the right time, at a good rate. But the reasons the government gave for allowing people to undo these deals are still valid. The Treasury and Department for Work and Pensions both supported the move, which would have given people the freedom that they had been previously denied—and which people who retire in future will automatically enjoy.
Only those with the tiniest or largest pension savings were able to opt-out of annuities before 2015. The government rightly said that those who had not had a choice should be allowed to change these deals—but also said, again rightly, that it is important to help people understand what it would mean. Good guidance and advice was needed to help them make their decision. The consumer protection was being put in place when I stood down as Pensions Minister. But now, the government has suddenly abandoned the whole idea.
Many people felt they had wasted their hard-earned savings on annuities, which often give poor returns. Many had to convert savings that were just an add-on to good final salary-type pensions, which were giving them security anyway. The extra small income from an annuity made little difference to their quality of life in retirement.
There are many circumstances under which people could benefit from selling their annuity, even if it incurred a penalty charge. People may have other pensions that cover their regular needs and want to cash in just one policy to help with other costs. They may never have wanted to buy the annuity but had no other choice if they wanted to just take their tax free cash. They may have bought a single life annuity but now realise they would like to provide for a spouse. Their circumstances may have changed, they may need to pay off debt, or they may just prefer to have a more flexible pension income product.
Several firms had already expressed an interest in participating in the secondary annuity market and some companies were also prepared to buy back annuity income from their own customers. Clearly there would have been extra charges involved, but some people would have put up with this if it meant they could use their pension funds in ways that enhanced their lives, rather than being stuck with an unsuitable annuity income.
Of course, consumer protection is vital, and it was due to be in place for April 2017. People would have been required to take independent financial advice for larger sums, and to use PensionWise, the government’s excellent free financial guidance service, for smaller sums.
PensionWise staff would have helped people understand the implications of selling an annuity income, the circumstances in which it might be appropriate and the value for money they may get. These requirements would have ensured consumers had much better protection than when they bought their original annuity. Just as with the new pension landscape, if people have other pensions or large debts and want to spend their lump sum straight away, that should not be a reason for concern. Some purists believe annuities are always the best policy, but some people will definitely be better off with a less restrictive environment.
Having raised people’s hopes, it is wrong to leave them stuck with a product for life that they were forced to buy and may not be what they really need. I hope the government will reconsider this deeply disappointing decision.
