Treasury bin new pension freedom
THE Treasury have binned plans to let people sell their annuities, after industry figures and the Financial Conduct Authority (FCA) warned that it would provide poor value to customers.
Initially introduced by ex-Chancellor George Osborne in March 2015 as part of his "pension freedoms", the plans would have come into effect from April 2017.
They would have allowed pensioners with annuities - which pay a fixed income for life - to sell them in exchange for a lump sum.
However, critics warned that it would be too difficult for most people to determine whether they were getting a good deal from brokers and insurance firms.
And while this suggests that the Treasury's u-turn is to be welcomed as a sensible move, it also indicates how the pre-existing pension freedoms are similarly difficult to understand and even dangerous for some pensioners.
This is why it's fortunate that the Treasury have backed down from making them even more complex.
According to industry experts and ministers involved in evaluating the now rejected plans, they would have simply given pensioners the freedom to make a short-term gain in exchange for a considerable long-term loss.
Tom McPhail, Head of Pensions Research at annuities firm Hargreaves Lansdown, said, "The risks to the vast majority of annuity holders outweigh the benefits for the small minority who could benefit."
His firm had decided in September not to participate in the Government's planned secondary annuities market, and their opinions have been joined by those of industry body the Association of British Insurers (ABI).
The ABI's head of retirement policy also pointed to the considerable risks involved in an annuities market, noting, "the secondary annuity market came with considerable risks for customers, including from unregulated buyers."
It was precisely this fear of the lack of sufficient regulation and of robust safeguards that ultimately caused the Government to withdraw their plans.
Accounting for their move, the Economic Secretary for the Treasury Simon Kirby stated, "Allowing consumers to sell on their annuity income was always dependent on balancing the creation of an effective market with making sure consumers are properly protected."
Since the Government couldn't see a way of ensuring the protection of customers, they flip-flopped on the plans they'd officially green-lighted in December, much to their embarrassment.
Even though the u-turn does cast unflattering light on what now seems a poorly thought-out and shortsighted proposal, there's mostly agreement as to the sensibleness of this final decision.
It's sensible because, in effectively tying the value of an annuity to what a market would be willing to pay for it, the plan threatened to make volatile the value of something that by definition was intended to provide a fixed income for the rest of someone's life.
In other words, it would have turned the very idea of a pension on its head, transforming a supposedly dependable retirement fund into a speculative investment.
And yet, despite it being perhaps the riskiest idea associated with the pension freedoms, it is nonetheless emblematic of these freedoms as a whole.
First introduced in April 2015, they allow people to withdraw as much money as they like from their pension funds, with the first 25% not being subject to any income tax.
According to then-Chancellor Osborne and the Government, this introduces flexibility into pensions, granting savers the discretion to use their pensions in the manner most befitting their particular circumstances
However, the ABI warned in August that some pension holders are withdrawing their money too quickly, with a small minority withdrawing cash at a rate that would see their pensions being exhausted within a decade.
This is a worrying trend, yet it's part of a greater problem concerning the existing pension freedoms.
This greater problem is that, just as the scrapped plan would have essentially resulted in people gambling with their pensions on hard-to-judge offers from the market, the existing freedoms also expose people to a certain amount of second-guessing as to whether it's better to withdraw pension money now or later.
Since their introduction, any pension holder wanting some extra cash has had to consider whether the current economic conditions - e.g. inflation, interest rates, currency values - make it a good time to dip into their funds.
They also have to consider whether it might be better to wait until these conditions become more favourable, a task which even the most experienced of economists will find hard to do with any assurance.
As such, the existing pension freedoms are potentially almost as much a minefield as the now-cancelled plan to sell your entire annuity for the going market value.
It's for this reason that any customer considering to withdraw any substantial sum from their pension should really seek out financial guidance from such services as the soon-to-be-replaced Pension Wise. Alternatively, they could also take advantage of the tax exemption for pension advice that comes into effect from April 2017, using it to purchase specific advice tailored to their particular situation.
Because of the complexity that creates such a need for guidance, it's tempting to conclude that the new plan wasn't in fact withdrawn because it would've been much riskier than the pension freedoms. Instead, it was withdrawn because the new, Theresa May-led Government wants to distance themselves somewhat from these freedoms and the administration that introduced them.
And perhaps, if future research and statistics show that too many people are withdrawing too much of their pensions, they might possibly end up being scrapped altogether.
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