The government is banking on a rush by Britain’s pensioners to cash in their existing annuities following new freedoms announced in the budget.
George Osborne confirmed that from April 2016 he will give 5 million pensioners access to their annuity. Until now, pensioners locked into an annuity have only been able to exit by paying a tax charge of at least 55%. But annuities have been deeply unpopular following a fall in interest rates and because of the fact that when a pensioner dies, the annuity dies with them, rather than going into their estate.
The chancellor said: “For many an annuity is the right product, but for some it makes sense to access their annuity now. So we’re changing the law to make that possible. From next year the punitive tax charge of at least 55% will be abolished. Tax will be applied only at the marginal rate. And we’ll consult to ensure pensioners get the right guidance and advice.”
Documents released after the budget speech reveal that the Treasury is expecting to raise around £1bn from the move as pensioners sell their annuities and pay tax on the cash lump sum they receive. Pensions expert Tom McPhail of Hargreaves Lansdown said the projection of a £1bn tax take equates to 250,000 people selling out over the next two years, based on the fact that the average annuity in the UK is only around £20,000.
“That’s quite a lot of people and they are assuming they will make quite a lot of money from it. That is surprising when you consider that it may not even get off the ground at all, and if it does, the Treasury itself has acknowledged it will not be suitable for most people. Yet they assume 5% of the number of people who have ever bought annuities will sell them.”
The decision to allow pensioners freedom to access their annuities comes a year after Osborne’s 2014 budget bombshell, when he said that savers in pension schemes will not in future be required to buy an annuity, and can in effect do what they like with their money. That reform is also expected to bring a £1.2bn-a-year boost to the Treasury’s coffers, as savers choose to cash in their pension pots and pay a one-off tax charge.
Many pension experts remain puzzled about how the market for selling annuities will work. Nigel Bolton, a partner at law firm Irwin Mitchell, said: “I have real concerns over the timescale of this implementation for the pensions industry. Trustees of occupational schemes and employers are already dealing with auto-enrolment changes and are struggling to deal with last year’s announcements on pension freedoms and choice changes. The industry now needs time to settle down, and not be stressed even more with further changes.”
Most existing pensioners will be more focused on how much their annuity will sell for – and the industry is in deep disagreement about whether it will be good value. Figures from Fidelity Worldwide Investment suggest that a £100,000 pension pot that was used by a 65-year-old to buy a £7,000-a-year annuity 10 years ago would sell for around £48,000 today. In other words, the now-75-year-old is giving up their £7,000-a-year income for just £48,000, which may not sound like a good deal, given that they may easily live another 10 years or more.
However, others reckon that for the recently retired, selling up could be attractive. According to actuaries Hymans Robertson, annuitants who bought five years back could get back as much as they put in, despite having drawn an income for those five years.
It estimates that someone who used their £50,000 in savings to take out an annuity five years ago when they were 65 would have been given an income of £3,600 a year – so they would have had £18,000 in payments so far. It then reckons the now-70-year-old would be able to sell it for £58,900 – ie leaving them with £8,900 more than they had five years earlier, despite taking the income.
The chancellor promised guidance and advice for existing pensioners, but there are concerns about consumer protection, and how the market will operate. Prospective purchasers of an annuity are likely to require intrusive medical evidence to assess a person’s longevity before they are willing to make a purchase.
Meanwhile, pensioners in their 70s and 80s will face having to take complex investment decsions. Mark Abbs, a senior tax partner at accountants Blick Rothenberg, said: “There are great dangers from the vulnerable who will not be prepared for or understand the investment decisions they now need to take for what could be a life-changing decision. We need to provide adequate support and controls to help those who need it.”
