The consultation on creating a secondary annuity market was released alongside the 2015 Budget. The upcoming consultation had been flagged on the preceding Sunday, an unusual event, by a release on the HM Treasury website. The stated intent of allowing annuity income to be sold is to bring the pensions freedoms resulting from the 2014 Budget to a wider audience, levelling the playing field between those who had purchased an annuity prior to the 2014 Budget and those who had not. The proposed actions are the consequences of a previous action. There might well be a whole series, of potentially unintended, consequences arising from this proposed action.
The 2014 Budget granted freedoms to Defined Contribution (“DC”) savers. Defined Benefit (“DB”) savers were explicitly excluded from directly accessing the freedoms tabled last year. However, non-retired DB savers can potentially take advantage of the freedoms after transferring to a DC arrangement – a non-trivial process. The annuity measures now being contemplated might simplify access to the freedoms for some retired DB savers but not others – a seemingly greater inconsistency than the one these annuity-related measures seek to address.
Pensions arising from DB schemes are either paid from the scheme (perhaps backed by an annuity owned by the scheme) or via an annuity owned by the saver (purchased by the trustees of the scheme to secure the benefit due from the scheme). If the annuity is owned by the saver, it is no different to an annuity purchased by a DC saver. Government recognises this equivalence and “is proposing that only annuities in the name of the annuity holder and held outside an occupational pension scheme are within the scope of these new freedoms”. In short, the freedoms are being extended to some DB savers.
Effectively extending the freedoms to some retired DB savers but not others serves to highlight a number of fresh inconsistencies, including:
- Why not allow those in receipt of a pension from a scheme to sell this income stream too? They are receiving the same benefit as an annuitant, just from a different source;
- DB pensioners, in receipt of a scheme-based income, are currently prohibited from transferring their benefits to an alternative pension arrangement. Why should pensioners receiving their income from an insurer be treated differently? However, removing the prohibition will bring a host of issues of its own, particularly for underfunded schemes; and
- If DC savers can access their savings with little difficulty from 55 then why can’t DB savers have this same freedom too? The current process (requiring transfer to a DC arrangement or, as proposed, purchase of an annuity and subsequent sale of the income stream) is cumbersome and probably costly. Why are non-retired DB savers being discriminated against too?
The freedoms announced in the 2014 Budget fundamentally altered the UK pensions landscape, if only from a regulatory and taxation perspective (the need for financial security through retirement has not changed). As with most changes, a two tier landscape resulted – some do not have the opportunity to take advantage of the changes as a result of a decision made prior to the change (in this case, the purchase of an annuity). Further, annuity purchase was the result of a conscious decision not some mandatory diktat. Annuity purchase has not been compulsory since 1995 (confirmed by paragraph 3.5 of the freedom and choice consultation), a point evidenced by the 25% of DC retirees who did not buy an annuity at retirement (as per paragraph 2.2 of the annuity consultation document). I am somewhat mystified, the pending election notwithstanding, why this Government seems so intent on providing annuitants with a second bite at the cherry – or should that be setting up annuitants to be bitten a second time? The effort seems out of proportion to what the Government itself admits is anticipated to be a relatively niche market (as described in paragraph 2.22 of the annuity consultation document).
Allowing the annuitant to sell the annuity will not cause those who feel they have been ripped off to suddenly feel whole again. If anything, the ‘opportunity’ to sell their annuity exposes them to the risk of being ripped off again. If the Government does feel the urge to intervene, perhaps it can come up with some arrangement whereby annuitants can modify their contracts to include a spouse’s pensions, escalation and/or underwriting if these features are not present in the existing contract and the annuitant can demonstrate that these features were not offered in the original sale? Any changes would be made on a ‘cost-neutral’ basis. The demonstration that features were not originally offered and that changes have been made on a cost-neutral basis are two minefields in themselves and well beyond the scope of this short blog post.
The proposal to allow annuitants to sell on their annuity income is fraught with potential pitfalls on multiple levels, many of which have not been raised above. I hope that Government, whoever that might be by the end of the consultation period, uses the exercise to analyse the potential consequences of the proposed changes in detail. Seeking to achieve further consistency between different groups of savers with similar fundamental positions might lead to a whole host of unintended issues. Some savers will not be able to access the freedoms that others were granted by the 2014 Budget. How about accepting this inevitable consequence of the 2014 Budget changes rather than compounding them by making further changes that then lead to other issues?