This will certainly be welcome news for some pensioners who might be able to make better use of a lump sum than a relatively small routine income, although that income will be paid for the rest of their life. It might be even better news for the Government as we presume they will take advantage of a substantial tax windfall. As with all pension plans, only the first 25% of it is tax free, existing annuity customers will have already decided whether to take their tax free lump sum, this means that any future lump sum is likely to be liable to income tax. It is fairly possible that a lump sum payment from a traded annuity might even move the pensioner into the 40 % tax band, and potentially 45%.
Presently if asked by a consumer "when will I have the ability to trade in my annuity" our response has been that legislation won't be passed (and prodcuts developed) until April 2016. Mr Osborne's comments today appeared to verify this. This is unquestionably amazing news, but there are a number of dangers and concerns that go with it.
Of a lot of concern to us, and other industry specialists, are the answers continuously given to concerns about what happens if an individual blows all of their pension fund in one go and afterwards finds themselves without any earnings in what could be a very long period of retirement. Andrew Marr once more pursued this question today. The Chancellor's response was typical of answers previously given by himself and other ministers - he suggested that he thought such a mindset was rather patronising and that people could be 'trusted' to utilise their pension pots wisely.
The pension freedoms announced in 2014 undoubtedly triggered much anticipation and there are many consumers who plan to take a huge lump sum, if not all their pension fund, in one go as soon as the brand-new financial year begins. Even if the huge majority make financially sound choices there will certainly be some who will could live to regret the option.
As a web company, our strategy is to offer clients all the information they need to have to enable them to make an informed choice. As we offer a nationwide service it is not possible for us to make a personal recommendation to customers who we may never even speak to. We will therefore offer our clients a non-advised service where they comprehend and accept that the decision to offer the annuity for a cash lump sum is totally theirs.
It is somewhat odd that the announcement was made in the same weekend when the media was likewise reporting that the regulator, The Financial Conduct Authority, has really significant concerns that numerous consumers who did purchase an annuity might not have got the very best deal possible. With the threat of future settlement claims, it could be that some annuity firms might be keen to purchase their way out of annuity contract they think might have become harmful to their profitability. Nevertheless it is highly questionable if such an offer is likely to be in the best interests of the consumer.
There have actually been previous examples of governments blowing the trumpet announcing brand new benefits for people, only for those benefits to be proved to be somewhat lacking few years later. The announcement by the Thatcher government that people could contract out of the Second State Pension and their occupational pensions in favour of having the contributions paid directly into an individual pension in their name, developed a substantial client demand. Undoubtedly many clients independently decided to do this and sought out a business to assist them achieve it. However when it was subsequently shown that the client would have been much better off staying with their old pensions, it was the financial advisors and insurance business who picked up the bill - in many cases unjustly. We did not have any such concerns in our company, but we took the lessons from it.
Lots of advisors will bear in mind the contracting out issue and may think twice before providing any recommendations whatsoever that suggests that a consumer should sell their annuity. In effect they will say "don't do it, however if you wish to, here is an application form". All consumers must keep in mind the age old principle 'caveat emptor' meaning 'buyer beware'.
Please do not believe we protesting against these changes, we are not. There would not be much point in running an internet site providing the service, it is important however the we highlight what we believe are some important concerns at this early stage.
We see it as our role to make customers knowledgeable about the threats which they will need to consider before they make the an important choice for themselves. For some clients it will certainly be an advantage to exchange a small annuity income for a lump sum, for others a possible error. It is necessary that the consumer understands that, with the industry being caught in the middle of the Government's brand-new modifications and what has previously been considered best advice", all financial advisory businesses might be extremely uncomfortable providing conclusive recommendations in this area. The client will have no one else to blame if they do make a bad choice except themselves.