Radical plans to give millions of existing pensioners new flexibility to sell their annuities for cash are under serious consideration by ministers ahead of next week’s Budget, building on the far-reaching reforms of the pensions system announced last year.
Jo Cumbo’s sources are Treasury sources, having found one rabbit in the hat, it looks like they’re going for the cat.
Scalping annuities – a victimless crime?
This is the political equivalent of a “victimless crime”, there is no market interference , only a removal of previous interferences and a destigmatisation of the currency of death.
It may seem bizarre that there’s demand for income that’s life-dependent but there is. Like bookies with too much money staked on people dying tomorrow, our financial markets are short on immortality. They need healthy annuitants and their income streams to balance their books.
So if you go down to the financial woods today, don’t be surprised to find a bunch of insurers , reinsurers, pension scheme trustees and bankers, only too happy to offer you a price on your life. Infact they are circling for your money like a scalp for your ticket.
Collectively we’re short on immortality
A ticket for the wrong gig?
And the chances are , if you’ve bought an annuity, you think you have a ticket for the wrong gig. If you bought your annuity ten or fifteen years ago, you will be pleasantly surprised by the deal you are offered, you bought into the market when there were expectations of interest rates remaining high.
But if you bought your annuity recently, you may be in for a nasty surprise. Even discounting the payments you’ve already had, you won’t find yourself being offered the money you paid for the thing.
Part of this is of course to pay for the costs of trading and the margins of the sale. As those evergreen moaners Higham and Ralfe put it
But the debate about whether we should have a second-hand annuity market goes deeper than talks of fleecing, the Treasury are simply extending the liberalisation they started when Osborne told us we need never buy an annuity again.
Where will it end (snorts the actuary)?
And if you can release people from the bondage of the annuity, you can release them from their final salary pension (I am sure that the school shop will be only too happy to take back that uniform). Why stop there – why not pay out the basic state pension as a lump sum based on GAD rates, or better still as the sum of your national insurance contributions with a bit of interest on the top?
I am sure that Steve Webb lies in bed at night with these mischievous thoughts jumping up and down like sheep over the stile.
And Webb, Parliamentarian of the year, cheeky chappy from the black country is having a good old laugh at all our expenses – as you would.
Stevie Webb- having a laugh!
Far from being appalled, Webb- and I’m right with him here, is crying “bring it on- let’s have a debate about pensions that people can understand”.
If we can find a price for a second-hand annuity, we can find a price for that DB pension and the State Pension , and when we know what people are prepared to pay for these things, perhaps we’ll be a little a bit more serious about cherishing them.
Infact, if we knew the value of these pensions, with their guarantees, we might ask more questions like-
“how much could I get without the guarantee (CDC) and how much would I need to have to manage my own pension (income drawdown)”.
Lighten up – the Cat in the Hat is back!
This is, I hope, the reason for the FT being fed this stuff as we start the glide path to May’s election. For Osborne, this is about ensuring the debate on Freedoms does not descend into a bitch about Pension Wise and advice and guidance. For Webb it is about his life’s work, getting people to pay attention to their pension.
For the pension industry, it is another chance to shoot itself in the foot by stifling debate, or it is a chance to come out and shine (as usual Ros Altmann has seen the bigger picture).
I’m with Webb and Altmann and strangely I am with the Treasury. We need a national debate on pensions, on pension risk and on how we fund our old age- especially the unhealthy long-tail of decrepitude.
Last year we had the rabbit, this year we have the cat, that hat has a few more surprises yet- I’ll be bound.
In the mean time watch the Human League sing “Dreams of Leaving”, a song that has haunted my adult life and should be the soundtrack to the pension liberation debate.