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Budget 2015: A Freedom too far?

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March’s pre-election Budget extended the incoming right for pensioners to use their savings as they see fit, to those already retired, benefitting around five million retirees.

From April 2016, existing pensioners will be given the right to sell their annuities, which they will be able to take as a lump sum or draw down over time, in the same way as those turning 55 from April this year will be able to.

For more information about the incoming changes, see our article ‘Should I take my pension as a lump sum?’ .

Poor value for money?

In many ways, the move is logical. The rates available on annuities have been in decline over the past few years, for various reasons, and it seems unfair to many that they were effectively forced to buy poor value retirement products when, had they retired a few years later, they would have been able to do what they wished.

According to pension information service Sharing Pensions, the annuity rates (i.e income) available for a hypothetical 65-year old male with £100,000 to buy a single life, level annuity with no guaranteed period (for more on the ins and outs of annuities, see our guide to annuities) have fallen from just under £8,000 in Summer 2008 to around £5,600 in March 2015 – a fall of around a third - and hit an all-time low of £5,373 in January 2013.

On this basis, allowing pensioners to unwind deals makes sense, but putting it into practice will prove a serious challenge.

When Pensions Minister Steve Webb floated the idea of allowing pensioners to sell annuities earlier this year, the pension industry’s reaction was a mixture of shock and incredulity – shock, in that the move was unexpected, and incredulity as it was hard to see how the idea might work in practice. The Government is consulting on how a second-hand annuity market might work, but there are still lots of important questions that need to be answered and that anyone considering cashing in an annuity would have to think carefully about before going down that road.

Professional financial advice will be essential to make sure you make the right decision. Read our article ‘Government plans right to sell annuities’ to find out more about Steve Webb’s ideas.

More questions than answers

Firstly, who will buy second hand annuities? The Government has ruled out allowing your current annuity provider to buy it back from you, so will there be an open market where different providers can bid for it, and you choose the best price? Is it realistic to expect providers not to make some margin when you cash in?

More importantly, how do you set a fair price for a second-hand annuity? Could you expect the value of the cash pot you had, minus any payments? Or would the value be based on current or historical annuity rates when you bought it? Anyone buying a second-hand annuity could be taking on huge risk as the product stops paying out when you (or a surviving dependent) die. It’s easy to see demand from people who bought an annuity in good health then wanted to cash it in because of serious health issues, like a cancer diagnosis, so will a medical be involved? And given their likely shorter lifespan, would buyers be likely to offer the best rates in these cases?

Cashing in an annuity is a bit like selling unused holiday money back to the bank when you don’t even know if the country you visited will be around the week after – it’s hard to see how you’ll get the best deal, given the risks and uncertainty involved. The Government itself admits that ‘“for most people, continuing to hold their annuity will be the right decision’” – but extending the incoming pension freedoms to all pensioners levels the playing field, even if not everybody is expected to play the game.

See the Budget 2015 headlines in our article ‘Budget 2015 – what you need to know’.

Do you intend to sell your annuity, given the chance? Let us know in the comments below.

This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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