Existing retirees may be given the right to sell their annuities, under plans unveiled by the Government.
Pensions Minister Steve Webb has said that people who have already retired should be allowed to ‘cash in’ their annuities and receive a lump sum that they can use as they see fit.
The plans will affect only those retirees with defined contribution or money purchase pensions, who bought an annuity with their pension pots. However, they will not be in place by the time the new pension freedoms, which mean retirees no longer have to buy an annuity or prove they have adequate means for drawdown, are due to come into force in April.
Speaking to the press, Webb said: “One of the main criticisms [of the new freedoms] has been about what happens to the people who are already locked in.
"For them, as it stands, there's nothing you can do – you have signed a contract and are stuck for life. My question is, is that fair? Can we not say to these people, 'well if you would rather have cash than income for life, then we will look at changing the law to make that possible'?”
Webb said the plans were being drawn up by the Department for Work and Pensions to explore the idea in more detail.
However, the pensions industry has raised questions about how the new powers might work in practice, and whether they would be in the best interests of retirees.
In particular, questions have been raised over how a market for annuities would work, because as annuities are contracts tied to an individual person’s lifespan, it would be difficult to set fair prices.
Malcolm McLean, senior consultant at Barnett Waddingham, an actuarial and pensions consultancy, and pensions media commentator, said the plan was a “logical extension” of the new powers, but added: “Protections will probably be needed to prevent pensioners - especially the very elderly - being ripped off. For many the cash option may well not represent good value for money.”
Nick Salter, President of the Institute and Faculty of Actuaries, said creating a market for annuities would not be easy, and highlighted the need for retirees to have access to financial guidance or advice.
“Allowing existing pensioners to surrender their annuities will not be straightforward, for consumers or annuity providers. In the midst of a large number of pension reforms, this further change would reinforce the need for individuals to have good guidance and, where required, good independent advice.”
This article has been commissioned by retiresavvy and any opinions voiced are the author's own.
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