The Chancellor has announced that the government will extend its pension freedoms to around 5 million people who have already bought an annuity.
From April 2017, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract.
Pensioners will then have the freedom to use that capital as they want – just as those who reach retirement with a pension pot can do under the pension freedoms announced in Budget 2014. They can either take it as a lump sum, or place it into drawdown to use the proceeds more gradually.
The new flexibilities build on the radical reforms announced in last year’s Budget, and due to come into effect on 6 April, which allow people to make their own, informed choice about what they do with their savings in retirement.
This could include being able to draw down from their defined contribution pension pots a bit at a time or taking their pension as a lump sum.
Chancellor of the Exchequer George Osborne said:
There are 5 million pensioners who are locked into annuities they have already bought. They should have the same freedoms as we have given everyone else.
For most people, sticking with that annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose - the same freedom we are offering those approaching retirement in April this year.
So I am going to change the law to let that happen, and make sure we have the right guidance in place.
People who’ve worked hard and saved hard all their lives should be trusted with their own pension.
Currently people wanting to sell their annuity income to a willing buyer face a 55% tax charge, or up to 70% in some cases. The government will remove this charge, so people are taxed only at their marginal rate.
To ensure people are in a position to make an informed decision, the government will be working with the Financial Conduct Authority (FCA) to introduce appropriate guidance and other consumer protection measures.
For the great majority of customers, selling an annuity will not be the right decision. However individuals may want to sell an annuity for instance to provide a lump sum for relatives or dependants; pay off debts; in response to a change in circumstances for example getting divorced or remarried; or to purchase a more flexible pension income product instead.
On Wednesday, 18 March, the government will launch a consultation on the measures that are needed to establish a market to sell and buy annuities.
This new flexibility is being introduced for people currently receiving income from annuities they have purchased. Approximately 5 million people are potentially eligible to benefit from this choice.
This approach fully recognises the contractual agreements between the annuity holder and the annuity provider, and does not unwind those contracts. Instead it allows the annuity holder to access the value of their property rights where they can find a willing buyer. The annuity provider would continue to pay the annuity payments for the lifetime of the annuity holder, but would reassign those payments to the purchaser.
These changes will allow the annuity-holder to access the value of their annuity where they can find a willing third party buyer.
The proposal will not give the annuity holder the right to sell their annuity back to their original provider, and the government is not minded to allow the original annuity provider to purchase, and then discontinue, their own customers’ annuities.
The government expects that obtaining the right to annuity payments could be attractive to a broad range of institutional investors and will be consulting over who should be permitted to purchase the annuity income. The government does not consider annuity income purchased on the secondary market to be an appropriate investment for retail investors owing to the complexity and difficulty in determining a fair price.
The government recognises that for most people retaining their annuity will be the right choice, and that making a decision whether to sell and at what price will be difficult for consumers. The government will be working with the Financial Conduct Authority to consult over and introduce appropriate support for consumers as part of its wider consultation on the measures needed to establish a market in annuities. This will include consultation on the extension of Pension Wise to support annuity holders considering whether to sell their annuity income. Pension Wise is the government’s free and impartial service to help consumers understand how to use their pension pot at the point of retirement. Extending the scope of Pension Wise would require primary legislation.
The consultation will be published alongside the Budget.
Image by Simon Cunningham on Flickr. Used under creative commons.