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Annuities up for auction; plans confirmed

Kit Klarenberg
Written By:
Posted:
17/03/2015
Updated:
17/03/2015

Pensioners who feel they got a raw deal on an annuity may be given the ability to extricate themselves from their policies in return for a lump sum.

Currently, an annuity is an irreversible contract, which pays a guaranteed income for life. However, as Your Money reported last week, government ministers are considering a new provision to allow retirees to sell their annuities. Then, the proposals were merely rumoured – now they have been officially confirmed, and pensions minister Steve Webb’s vision of a second-hand annuity marketplace may be close to fruition.

For many annuity holders, the prospect could well be an attractive one.  Sales of the product collapsed last year, and some within the industry believe that many holders only took policies grudgingly due to a lack of alternatives. “I have heard from so many who say, if the pension freedoms had been in place earlier, they would never have bought an annuity, but they had no choice at the time,” notes Ros Altmann, an independent pensions expert.

The change would offer relief to many retirees trapped in low-paying annuities or a valuable lump sum for those that have another source of income. Similarly, the fixed nature of annuity returns means that income can be eroded by inflation over time, so those with longer life expectancies may wish to seek higher-paying prospects with their retirement funds.

However, questions still remain as to how the system would function. It has been suggested that private companies could purchase annuities from current holders to sell on to new customers, with prices calculated according to a holder’s life expectancy and income. This notion has, however, been criticised by Alan Higham of Fidelity, who said “I just don’t see how something like ‘We Buy Any Annuity.com’ could work.”

Questions also remain about the risks for buyers, sellers and providers. Tom McPhail of Hargreaves Lansdown believes the change will lead to “insurmountable risks and costs” for all three, as an annuity “cannot magically generate extra yield for the policyholder.”

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“The attraction of a short term cash payment may well outweigh the guarantee of a long term fixed income, but a capital sum will only ever be at best the net present value of the future income stream,” McPhail said.

“People may be enticed into selling their annuity, and later regret it. There are likely to be significant costs and risks involved and these may well outweigh any potential benefit.”

Altmann, however, counters McPhail’s misgivings, noting that the proposal “is only an option.”

“Unlike past rules which forced people to lock their pension savings into a potentially unsuitable or poor value product that did not meet their needs, it gives them the chance to choose what they want to do.”