Plans to allow retired workers to reverse their pension arrangements and receive a cash lump sum have been scrapped this week.
The government took everyone by surprise last year and announced plans for a second hand annuity market that would enable holders to sell unwanted guaranteed income for a cash lump sum. Existing annuity holders would have been able to exit their contracts and regain control of some of their savings.
An annuity is an income-generating contract sold by an insurance company and usually bought with retirement savings. It guarantees an income for life.
Yet sales of annuities - which have been paying poor levels of income - have plummeted since the pensions freedoms were announced, as people plan to use alternative methods to generate income.
Those who had already purchased poor-value annuities and missed out on the pension freedoms were to be given a lifeline starting next April.
Here’s what you need to know about the decision to abolish plans for a so-called secondary annuity market:
The pros and cons of annuities
Is the U-turn bad news?
While there will be many pensioners who will be sorely disappointed, some industry bosses are convinced that the idea of being able to sell an annuity has been taken off the table is good news.
Steven Cameron, pensions director at Aegon says: “All the signs were the secondary annuity market would have been a pension freedom too far. Giving up a guaranteed income for life is a huge decision and not the right one for the vast majority. The risks and complexities for the many far outweighed any possible benefits for the few. We welcome the Treasury making this brave decision on grounds of consumer protection.”
Tom Selby senior analyst at AJ Bell agrees. He says: “The plans for a secondary annuity market were always riddled with problems. The market would have been stacked in favour of the buyer and posed unacceptable risks to savers, who could have seen the value of their pot ravaged by charges.
"Pension scammers would also inevitably have seized on the changes to target annuity holders. It was difficult to see a long term market where consumers would have got good value.”
Five annuity mistakes to avoid
Why might annuity holders want to sell up?
The level of income provided depends on many factors, including the interest rate on bonds issued by the Government at the time the annuity is purchased. Income from annuities is notoriously low and without any meaningful income, some holders may have benefited from a lump sum, albeit a small one.
I have an annuity - what are my options now?
An annuity is for life and if you already have signed a contract for one, then you are tied to it. The only exception is if you have only just taken out an annuity. Providers must give applicants a suitable cooling-off period, during which they can back out of the contract. In most cases, this is 30 days after a contract has been signed.
I’m yet to retire - should I even consider an annuity?
The regular income provided by annuities does give people the security of knowing they will not out-live their savings. So an annuity may still be the right choice for at least part of your pension pot.
If you have a financial commitment - such as a mortgage or rent - then you can rely on the income from an annuity for as long as you need it. So it might make sense to secure the amount you need and then use the rest of your pot for a drawdown plan for other spending.
5 reasons to buy an annuity
The key to finding the right annuity is to shop around. It sounds complicated, but it’s just like getting a quote for anything else - you can use a broker or phone around a few insurance companies yourself.
Find out how the Saga Annuity Service, provided by Legal & General, may be able to help you get more retirement income from your pension.