George Osborne, as Chancellor, positioned the plans for a secondary annuity market as extending the pension freedoms introduced in April 2015 which provide those with defined contribution pensions complete freedom to use them as they wish from age 55. The secondary annuity market would have offered those with existing annuities similar freedoms but the government felt they also created many risks which could have led to individuals ending up worse off.
“While it seems odd to argue against ‘freedoms’, sometimes these come at huge personal risk and it’s the government’s job to set policies which work for the greater good,” said Steven Cameron, Aegon’s pensions director.
“All the signs were the secondary annuity market would have been a pension freedom too far. Giving up a guaranteed income for life is a huge decision and while a small minority of people might have benefited, this would not have been right for the vast majority, opening them up to making decisions they might later regret. Both the government and the FCA openly accepted this.”
The existing pension freedoms can be very positive, but also place new responsibilities and hence risks on individuals. Having freedom to take as much or as little income from your pension fund whenever you like after age 55 creates risks of running out of money unless you lock into some form of guarantee. The secondary annuity market added further risks including realising too late you needed the income, getting a poor deal from a third party purchaser, being scammed or finding you had disqualified yourself from means tested benefits by spending the lump sum and leaving nothing to live off.
Cameron conceded that: “Some individuals will be understandably disappointed. Some who already have a secure income, perhaps from a defined benefit pension, might have been attracted to selling an unneeded future flow of annuity income for a lump sum, even after taking an income tax hit.
“But many others who might have initially been attracted to this could have lost out or been disappointed once they found out what was on offer.”
Saga said it is still waiting for more detail on why the government made the decision. Paul Green, director of communications, said: “This is a surprising announcement. The development of this kind of market was always going to be complex, and we await more detail about the consumer protections that the government felt this market was unable to provide.
“However, there will be many pensioners who will be sorely disappointed – thousands of people who receive minimal income from annuities they were forced to buy would have benefited from a way to sell their annuity. Indeed, research carried out by Saga found that 58% of people who wanted to sell their annuity were receiving such a small income they could do nothing meaningful with it. It looks now that there will be no way for them to turn that meagre income back into a lump sum.”
However Rob Yuille, ABI head of retirement policy, agreed that scrapping the plans was the right move: “This is the right decision for the right reasons. The industry has consistently supported the Freedom and Choice reforms, but we agree with the government that the secondary annuity market came with considerable risks for customers, including from unregulated buyers.
“The ABI has highlighted the challenges involved and worked constructively with the Government to try to solve them, but consumer protection has to be the priority.”
Fidelity also welcomed the move. Richard Parkin, head of pensions policy, said: “While we could understand the thinking behind this, this looked set to be complex with customers struggling to achieve good value and very few people set to see any true benefit.
“We would urge the government to focus its attentions on ensuring the success of auto-enrolment and creating a coherent system of incentives to save for retirement.”