Pensioners 'could sell their annuities'

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From April 6th, anyone with a defined contribution pension will be able to access the money saved in it, and do with it whatever they want - but previously people who had already used their pension funds to buy annuities were stuck with the choices they'd already made.

So the Government is now consulting on a change to the rules that could see millions locked into existing annuities being allowed to cash them in without being hit by a hefty tax bill.

The Chancellor says sticking with an annuity will be the wisest course of action for most people, but it's only fair that everyone should get the same freedom regarding their pension funds.

Unprecedented freedom

Ahead of April's changes - detailed here - the Financial Conduct Authority has brought in extra regulation to provide protection and warnings to those wanting to access their money, while the Government has launched the Pension Wise service to offer tailored help and advice.

Those who reached retirement age in the past year were given leave to defer buying an annuity until the rules changed - giving them the same freedom as this year's retirees.

Meanwhile, there's technically nothing to stop people selling the annuities they've previously bought with their pension funds - but anyone who does so faces taxes of at least 55% and up to 70%.

Under the proposed changes, that tax bill will be removed.

Instead pensioners will be entitled to sell the annuities they were obliged to buy to the highest bidder, and the money they make from the sale is theirs to do with as they wish.

For instance, they may want to use some of the money to help relatives or dependents, something around 20% of people accessing their money this year say they're likely to do.

Others may even choose to buy a new, better performing, annuity.

Necessary evil

Annuities have long been seen as a necessary evil.

No one can tell how long they're going to live after they retire - but most of us dramatically underestimate how long we've got left, and how much money we'll need to see ourselves out in comfort.

Annuities provide a guaranteed income for the rest of our lives, no matter how long they are. They pay out a certain amount every year, based on factors including life expectancy and interest rates.

Admittedly, they seem to penalise those who've taken care of themselves - because the money has to last longer - but they're still one of the better options for anyone who thinks they might have more than a few years left in them.

Unfortunately, there are several problems with how they work, and with the rules surrounding them, that have made them far less attractive than perhaps they should be.

Changing circumstances

Until the changes coming in this year, separate pension funds couldn't be consolidated - which meant that as people moved away from jobs for life, the various pensions they amassed had to be used to buy individual annuities paying out sometimes trifling sums.

If the proposals announced this week are approved, millions of people could benefit from bringing together the money in their existing annuities: having more money to invest could help them get them a better return than having several smaller funds.

Others could benefit from the fact that the markets have changed since they bought their annuities.

As a result of the financial crisis, the products offered in the past few years have given a far worse rate of return - in other words, a lower income - than those bought in better times.

We're not out of the woods yet in financial terms, but the situation looks far less bleak than it did a few years back - and that should translate into slightly better returns.

But the lack of enthusiasm for annuities, and predictions that far fewer people are going to opt for one come April, means competition and choice could decrease dramatically.

If and when the millions who already have them choose to sell up, but not to reinvest in another, the incentive for providers to offer competitive products and keep fees down will suffer further.

In short, annuities - the sensible option that provides some form of income for us no matter how long we live - could become even less attractive.

Patience

Everyone from MPs to consumer organisations has urged caution and patience regarding April 6th.

In October last year shadow secretary for work and pensions Rachel Reeves predicted the changes would bring "chaos".

Then, as the pilot version of Pension Wise launched earlier this year, Pensions Minister Steven Webb told people, "you don't have to rush this. Wait and see what products become available."

And this latest pension reform depends somewhat on the outcome of May's General Election. Labour says they support the changes in principle, but given a change of Government, the plans could be amended or scrapped completely.