Pensions Minister Steve Webb has declared that he desires pensioners who have previously acquired an annuity to have the ability to offer it in exchange for a cash lump sum. Considering the Chancellor's remarkable pension announcement at the 2014 Budget Statement, he may use this chance to announce modifications which lots of annuity consumers might welcome.
You would have to be significantly devoid of cynicism to think that the Government will not use next week's budget statement to make announcements that they think will earn them peoples' votes at the May General Election !!
The most significant, most dramatic and certainly unexpected change revealed in 2014 revolved around the removal of income caps on pension funds, permitting pensioners to 'drawdown as much or little as they want' from their pension fund. While these modifications have clearly been well received, lots of people who had already bought an annuity or who were members of final salary schemes, felt that these new flexibilities didn't extend to them. The Government have been looking at methods to address this.
In January 2015, Steve Webb went public with his strategies to allow people to cash in their annuity for a one off lump sum, declaring that annuity customers around the nation were 'urging' him to make this a reality. Making such an announcement four months prior to the General Election indicates that if he is sincere, he had better act quickly! With this in mind, lots of industry professionals think that the forthcoming budget statement will certainly start the process of making these modifications legal.
It needs to be kept in mind that even if the statement is made next week, it could still be many months, if not longer, before consumers get the chance to benefit from the changes. You may have to wait a little while longer before you can say ‘I want to cash in my annuity’.
Considerable work will need to be undertaken. There would have to be review and consultation, draft bills written, amendments and further changes and so on. It could certainly be a year or more before any bill is given Royal Assent-- the moment it becomes law. Should there be a significant change in Government, the plan to trade in annuities could be scraped entirely.
Even if traded annuity policies do end up being available, it is debateable whether the actual products offered will be as attractive as the initial idea. While we could be completely incorrect we believe the following are most likely to feature in a traded annuity market:
We don't believe that there will be any obligation on existing annuity suppliers to reimburse or return any part of the money they originally got from the client when they first acquired their annuity. Having stated that, numerous existing annuity suppliers may wish to do this to lower their financial risk of the consumer living longer than expected and consequently lowering their profit. The consumer might likewise get more money if, instead of dealing with their existing annuity provider, they offer their annuity income to a new company who will provide them an immediate lump sum amount.
Clients will probably need to be prepared to trade their annuity at a discount. As an easy example, a pensioner with a life of expectancy of 10 years who got a gross (prior to tax) annuity income of £5,000 per annum, would get £50,000 if they lived for exactly 10 years. Therefore in anticipation of the consumer living for 10 years, the customer might be offered say £40,000 in exchange for the regular annuity earnings. The customer is losing a potential £10,000 in the future for an ensured £40,000 now.
This might mean that if the customer dies after 2 years, the business who acquired the annuity income may be significantly out of pocket - as they would no longer be able to get the annuity income. They have paid 8 years income in advance; however they will only have received 2 years earnings in return.
However if the customer survives for 15 years the company have actually got an even better outcome, as there may not be any responsibility on the supplier to share these added earnings with the initial customer.
In all contracts that are based on a consumer's life expectancy there will be winners and losers, however who the winners are will certainly not be understood till the customer dies!
The lump sum the customer receives will be liable to income tax. We cannot see how this will not be the case.
In the example above, a client selling their annuity for £40,000 will have the sum even further lowered by tax. Based on 2014/ 2015 tax rates we presently think that a consumer aged under 65 would have virtually £6,000 to pay in tax *. This amount would be even more if the customer has other earnings.
We need to stress that the assumptions above are pure speculation, however we don't think there are a lot of who would disagree with us at this phase. Product providers and companies will have to think very careful about what they can offer to provide attractive products for customers.
Lastly as a consumer orientated company, our primary objective is that clients attain results that are appropriate for them. It is for that reason essential that we continue to make you aware that while an immediate lump sum may be very helpful and attractive, once it is gone that is it. An annuity on the other hand will continue to pay you a guaranteed income for the entirety of your life, even if you pass away many years after your anticipated life expectancy - we hope you do.
This webpage has discussed current topics in a very simple format, if you would like more information on any aspect, please feel free to contact us. You can call us direct on 020 33 55 4827.