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Was the Government Right to U-Turn on Annuity Plans?

The Government has this week scrapped plans to introduce a secondary annuity market. Proposals were originally leaked before the March 2015 Budget, suggesting that those with existing annuity deals would be able to sell them for either a cash lump sum or trade them in for a better rate of income.

The secondary market was proposed to guard against inequality between generations of retirees – those which retired before April 2015 and could not take advantage of the pension freedoms were perceived to have got a raw deal compared to their younger counterparts. As of April last year no one is obliged to buy a compulsory annuity at retirement with their pension savings. Although annuities remain the only product on the market which guarantee an income for life they have become unpopular in recent years.

This is because annuity rates are based on the 15-year gilt yield, which back in 2007 peaked at 5.27% and in August this year fell to just 0.98% – meaning that the rates offered by annuity companies in exchange for savers’ pension pots have become progressively worse.

Forcing savers to lock into an income for life at a record low rate was deemed unfair by then Chancellor George Osborne, and so pension freedoms were announced in the 2014 Budget freeing retirees from the obligation. A secondary annuity market was proposed to level the playing field for those unfortunate enough to have already locked themselves into paltry rates for life.

“The Right Decision”

On the face of it, the scrapping of this proposal is a bad thing – snatching the get out clause from those already in retirement. Figures compiled by Saga suggested that 58% of people who wanted to sell their annuity were receiving such a small income they could do nothing meaningful with it. But many experts say the cancellation is a good news.

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Tom McPhail, Head of retirement policy at Hargreaves Lansdown said while it would no doubt come as a disappointment to some annuity holders who were looking forward to restructuring their retirement income, the Government had “made the right decision”.

Hargreaves, the UK’s largest annuity broker, had previously announced it would not be participating in the market due to potential risks of longevity – that people would run out of money in retirement, high costs and lack of choice and that the market was open to fraudulent behaviour.

Elliott Silk, head of employee benefits at Sanlam said he was pleased that the government had decided to scrap the idea of the secondary annuity market.

“It would have added an extra layer of complexity in what is already a complicated retirement playing field,” he said. “Savers have so many different choices to make at retirement anyway and knowing that the selection of an annuity would no longer be a decision for life and could be reversed out at a later date could result in some poor financial decisions.”