On today's Andrew Marr Show (Sunday 15th March 2015) Chancellor George Osborne appeared to validate what has long been presumed, namely that the Government are going to lead the way in allowing people who have currently bought an annuity to be able to trade it in for a cash lump sum.
This will be welcome news for some pensioners who might be able to make better use of a lump sum than a relatively small regular income, despite the fact that the income will continue for the rest of their life. It could be much better news for the Government as we believe they will reap the advantage of a tax windfall. Just like all money taken from a pension, (after the initial 25 % tax free lump sum) we believe any lump sum you receive for your annuity will be liable to income tax. It is more than possible that a lump sum payment from a traded annuity could push the pensioner into the 40 % tax band, and possibly higher.
Presently if asked by a client "when will I have the ability to sell my annuity for a cash lump sum" our answer has been that legislation won't be passed (and products created) until April 2016. Mr Osborne's remarks today appeared to verify this. This is certainly really exciting news, however there are a variety of threats and issues that go with it.
Of significant concern to us, and other industry specialists, are the answers continuously provided to questions about exactly what happens if an individual blows all of their pension fund in one go and then finds themselves with no money in what could be a long duration of retirement. Andrew Marr once more pursued this question this morning. The Chancellor's response was common of answers formerly offered by himself and other ministers - he indicated that he believed such a point of view was rather patronising and that individuals could be 'trusted' to use their pension pots carefully.
The pension freedoms announced last year certainly triggered much excitement and there are numerous clients who are prepared to take a huge lump sum, if not all of their pension fund, in one go and as quickly as possible, once the new financial year begins. Even if the vast bulk make economically sound choices there will undoubtedly be some who will come to regret the choice.
As an internet company, our aim is to offer clients all the information they need to enable them to make an informed decision. As we provide service across the country, it is not possible for us to make an individual recommendation to customers who we may never ever even talk to. We will provide our clients with a non-advised service where they comprehend and accept that the choice to sell their annuity for a cash lump sum is totally theirs.
It is rather odd that the statement allowing customers to sell their annuity was made in the exact same weekend when the media was also reporting that the regulator, The Financial Conduct Authority, has particular concerns that numerous customers who did acquire an annuity might not have got the best deal. With the threat of future settlement claims, it could be that some annuity companies may be eager to buy their way out of annuity arrangements they think may present them with a future liability. Nevertheless it is extremely questionable if such an offer is likely to be in the best interests of the consumer.
There have actually been previous examples of governments blowing the trumpet signalling brand new advantages for people, only for those advantages to be proved somewhat dubious a couple of years later. The announcement by the Thatcher government that individuals could contract out of the Second State Pension and their occupational pensions in favour of actually having the contributions paid directly into an individual pension in their name, produced a significant consumer demand. Undoubtedly many clients separately decided to do this and looked for a business to assist them achieve it. Nevertheless when it was subsequently proven that the client would have been much better off sticking with their old arrangements, it was the financial advisors and insurance business who picked up the bill - often unfairly. We did not have any such problems in our business, however we learnt the lessons from it.
Numerous advisers who will keep in mind the contracting out problem might be reluctant to provide any advice service whatsoever that implies that a customer should sell their annuity. In effect they will say "do not do it, however if you wish to, here are the forms". All consumers should keep in mind the age old principle 'caveat emptor' meaning 'buyer beware'.
It would be wrong to believe we are against these changes, we are not - there would not be much point in running a site offering the cash in my annuity service. However we are eager to make clients aware of the dangers and that they will have to make the choice for themselves. For some clients selling their annuity for a lump sum will certainly be an advantage, for others a possible error. It is very important that the client comprehends that, with the industry being caught in the middle of the Government's brand-new modifications and what has previously been considered ‘best advice’ many financial advice companies may be really uneasy offering definitive recommendations in this area. The client will certainly have nobody else to blame if they do make a bad decision other than themselves.