A new proposal is in the pipeline to allow existing pensioners to trade in their annuities for cash. More choice is of course a good thing, but many still lack the knowledge and confidence to make such life-changing pension decisions.
Pension change continues to gather pace, with the news that Pensions Minister Steve Webb wants to allow individuals who have already bought annuities to trade these in for a cash lump sum. If it comes about, then this could be yet another major change in what is already the biggest pensions overhaul for many years. It would also give elderly people yet another critical choice to make â just when theyâd begun to think all that was behind them.
A second chance to get your retirement right
Speaking to The Daily Telegraph, Steve Webb explained that although the new regime made it no longer compulsory to purchase an annuity, up to five million existing pensioners had already done so, and many felt disappointed at having missed out on the reforms. Mr Webb now proposes a plan under which pensioners can sell their annuities to the highest bidder at any time after they have retired.
An annuity is an insurance product that provides a guaranteed annual income for the rest of the holderâs life. There are some clear advantages to this â itâs hard to guess exactly how long you will live, and you donât want to face the prospect of your money simply running out. Currently around 400,000 people each year use their pension pot to buy an annuity. However, there are also undeniable advantages to having a large sum up front â for instance to invest, give money to children or make other major purchases. Which option is preferable depends of course on individual circumstances and goals.
Mr Webb said, âI want to see if we can get these freedoms extended to those who are receiving an annuity but who might prefer a cash lump sum. No-one would be obliged to do so, but for those who would prefer up-front capital to regular income, I can see no reason why this should not be an option.â
As things stand, annuities are a one-way street â once an individual has one, they are locked into it for life. Consequently it has been the biggest financial decision that most people will ever make, and many have been stuck with low-paying schemes that fail to reflect the value of their savings. The proposed changes could therefore be a chance for individuals to backtrack and make a better choice â if they can.
Will the choice be a better choice?
Karen Barrett, chief executive of unbiased.co.uk, commented: âSteve Webbâs latest proposals for pension reform would certainly be fairer on existing pensioners. However it doesnât solve the problem highlighted in our recent research, which found that one in four people are already anxious about their retirement plans. One inherent risk of giving people a âchoiceâ to do something is that some individuals may interpret this as a recommendation of what they should be doing, without understanding how this meets their retirement goals.
âThis is too big a decision for the majority of people to take alone. As a next step, I would like to see the guidance guarantee extended to those who have already retired, and this in turn needs to point people towards sources of professional, individually tailored advice.â
Mr Webb hopes to set out the reforms in detail before the General Election in May, following a public consultation, and seeks cross-party support to ensure implementation no matter which party is elected. He said, âI want to see people trusted with their own money wherever possible.â While this is a good sound-bite, it glosses over the fact that many people donât really trust themselves with their own money. Being asked to make a single lump sum last for the rest of oneâs life is a daunting prospect for anyone. There is a very real danger that many will âescapeâ from their annuities mistake only to blunder into other financial dead-ends, simply because they find themselves in uncharted territory. It is also a lot of stress to face in oneâs retirement years, and a lot of new learning to take on board.
It seems that annuities â âthe last and biggest financial decisionâ â may not be so final after all. The difficult choices are going to keep on coming, which only increases the need for dependable, independent advice. If youâre trapped in a pension-related dilemma, make your first dig for freedom at unbiased.co.uk.
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