This is a big year for pensions. Whether they call it the “pension shake-up of a generation”, a time of “far-reaching changes” or the “biggest and most popular reform” in 50 years, pretty much every commentator agrees that we all need to get a grip on the new rules and, as Josephine Cumbo puts it in the Financial Times, “prepare for pensions freedom”.
We’ll write more on this (a lot more) over the next few months. But for now, we want to look at the plight of those who missed out on the new freedoms – those who have bought annuities in recent years.
Technically there has been no compulsion to buy an annuity for some time. Those with high incomes elsewhere have been able to enter “flexible drawdown”. Those with less have had the “capped drawdown” scheme (which allows you to take a limited amount from your pot every year).
But in practice, with not all schemes allowing this and the cap putting many off, there are, says pensions expert Ros Altman, still five to six million people in the UK “locked into” annuity deals they may never have taken had pension freedoms been in place earlier – and which many thousands of them would love to undo.
Good news, then, that those thousands have just been thrown a possible lifeline by pensions minister Steve Webb. Webb has suggested that pensioners should be allowed to cash in annuities for a lump sum. That lump sum could then be treated as a pension subject to the new, rather than the old, rules.
How would it work? There has long been a market in life-insurance policies and this would be much the same. You would go to a provider or investor and exchange your lifetime entitlement to an income for cash.
The price would depend on your health (the sick wouldn’t get much, given that the buyer wouldn’t expect to get much), any inflation linkage (this is valuable) and whether it is a single or a double annuity (investors will pay more if the annuity is designed to pay out to a partner after your death). The question is then how that lump sum will be taxed.
It could be counted as income immediately and taxed as such – or, if Webb is in his usual generous mood, the sum could be returned to a pension wrapper and then taxed as income on withdrawal as other pensions are to be.
There is huge room for exploitation here – if it takes off there will be endless stories in the papers of the elderly being ripped off and ending their days in penury – and it also isn’t yet policy. However, this is a government clearly determined to make people responsible for their own finances in retirement, be it a good idea or not. So we rather expect that it soon will be.