The Financial Conduct Authority (“FCA”) recently published its Retirement Income Market Data for the third quarter of 2015. The Data reflects that 68% of retirees over the period cashed in their pension savings in full. Many of those who withdrew all their savings have used their freedom to choose to make a contribution to Her Majesty’s Treasury. A lower rate of tax, if any, might have been payable had these savings been taken over time as income. These acts of selflessness in reducing the United Kingdom’s borrowings also incorporate another issue.
The Data shows that 68% of retirees entitled to a Guaranteed Annuity Rate (“GAR”) did not take up this facility. GARs are carryovers from the last millennium, promising savers annuity rates at retirement significantly higher than are available today. Consequently, these GARs are valuable benefits to those who hold them, often unknowingly so as the details are buried in mounds of contractualese.
Fortunately, the Government seems to have a plan in the works to provide accelerated access to the value of these GARs. It has only taken me the best part of a year since the announcement of the proposed secondary annuity market reforms to cotton onto the Government’s vision! I had viewed these reforms as ill-conceived when announced, and still generally do, although the GAR situation does represent a constructive application of the reforms.
Selling the annuity resulting from the GAR is likely to realise more value than is currently available via immediate encashment. More patience might be required before the proceeds of a sale can be accessed compared to the immediacy of encashment. Perhaps a market in providing loans secured by GAR policies might emerge to cater for policyholders whose need for cash precedes the point at which their GAR comes into payment. Such loans would then enable the policyholders to hold out for the GAR start point, crystallising the valuable benefit they are contractually entitled to.
The FCA estimates that over 1.5 million policies with GARs still exist in the accumulation phase. The secondary annuity market might effectively serve a portion of these policyholders who want to take advantage of the freedom and choice made available to their fellow savers while not losing out on the (bulk of the) value of the GARs they are contractually entitled to. Government looks to have created a useful mechanism to improve outcomes for this group of savers after initially appearing to have exposed these same savers to the risk of destroying value. Unfortunately, many of the 68% who did not take up their GAR entitlement over the summer of 2015 might well have lost value. Those whose timeframes permit the full extent of Government’s vision to emerge will, however, have the opportunity to benefit from the regulatory changes in future. Has the combination of freedom and choice together with the secondary annuity marketbeen a case of canny long-term planning by Government on behalf of its GAR-entitled citizens or have I been fooled by randomness?