For Sale - Annuity Policy. One Careful Owner.

After several weeks of speculation, the Treasury yesterday released its "consultation" on selling annuities (available here). Indeed, the Government seem to prefer to call it a "call for evidence" - which is a bit like saying that it's an idea that George Osborne came up with one evening, after a few beers in the pub with Steve Webb (although Osborne doesn't strike me as a beer type, perhaps it was a few glasses of claret), which still needs to be fleshed out a bit.

The document makes it pretty clear that there's an awful lot of important detail that hasn't really been worked out. For example, the Government still seems undecided about whether to allow annuity providers to “buy back” annuity policies from policyholders, as an alternative to selling an annuity to a third party. The Government is clear that “consumer protection” is required, but the nature of that protection is unclear. Fundamentally, if you are selling your annuity, the advice you need is whether the sum you are offered is a good deal, which boils down to whether the party buying your annuity thinks you are in better health than you really are.

Practical problems - like how to work out when an annuitant dies, if the annuitant no longer has an interest in the annuity policy - are flagged, but the Government doesn't seem to have a clear view on how to solve them.

The Government seems to want to make the sale of an annuity to a third party subject to the agreement of the annuity provider. Now why would an insurance company agree to this? The risk for the insurer is that they overpay on the annuity policy because the new owner of the policy has no idea whether the annuitant is alive or dead. So I anticipate that insurers will be reluctant to agree, unless they can charge a fat fee for the pleasure of doing so - which may simply mean that the option to sell an annuity becomes prohibitively expensive.

Notwithstanding this lack of detail, the Treasury is optimistic enough to budget over £500m in extra tax revenue (in the first year alone) as a result of annuity sales. This must assume that not only will annuitants sell their policy, but that they will also take the proceeds more quickly than would otherwise be the case, thus accelerating tax revenue. There is a certain irony about this - in the introduction to the consultation, the Government says that it "believes that for most people, keeping their annuity income will be the right decision" - yet clearly the Treasury think that enough people will make the "wrong" the decision to give them a significant tax revenue hike.

Ultimately, this half-baked policy feels like opportunistic electioneering – the vagueness of the consultation gives the impression that, post-election, it might quietly be kicked into the long grass, to wither and die.

John Broome Saunders

Actuarial Director

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstone.co.uk

Coming out as "protectionist"

With the Labour party toying with the politically risky idea of rolling back the new pension flexibilities it is perhaps a good time to consider where we may be going.

The success of the flexibility and freedom of choice for all with their pension assets hinges on the quality of the guidance AND advice that individuals receive. Everyone in the industry can already tell you that a form of generic guidance will be insufficient for the majority to make the right decision and will come down to chance without the correct appreciation of the risks. Without an appreciation of the risks many will experience poor and disappointing outcomes. With flexibility and freedom comes a bewildering array of choice and complication and the opportunity for mis-selling and further devaluation of pension savings.

If the first step on the path to advice is guidance, albeit restricted to pensions assets, then this will give us the greater chance to see better outcomes for members.

However, for this to succeed financial education needs to be increased at all levels. Employers should be encouraged, on a safe harbour basis, to provide financial education to all staff, from new joiners to those looking to leave and move into retirement. Schools need to engage with charities like MyBnk and the like to start the cultural change to financial literacy, knowledge and understanding across the board.

We must recall, and not forget, that drawdown was described just weeks before the 2014 Budget as a highly sophisticated product only suitable for wealthy investors. Drawdown is complicated and a minefield for laypeople to address alone. With this the prospect of pensioner penury is a very real one.

On one hand many people are naturally frugal and the argument exists that they may live on too little to keep what they have. However, many will spend too fast too soon and run out of money and fall on the state.

By retaining an income requirement a level of guaranteed income, a safety net remains, with full flexibility allowed for benefits in excess of this.

However, continuing with complicated rules does also devalue pensions and almost certainly results in individuals being forced into buying annuities at a time when they do not give the best value. Although with improvements in longevity many will still win this bet.

So, on balance I believe that a brake should be applied to the flexibilities:

 

1.   Delay the introduction of full flexibility (see 2) for the process and guidance to be properly introduced. Allow capped drawdown, as now, without triggering the Money Purchase Annual Allowance

2.   Continue the Minimum Income Requirement (MIR) for flexi-access drawdown at £12,000 pa.

3.   Continue with the small pots solution, indexed with Consumer Price Index (CPI) so members with small funds can still receive these where the MIR is not reached

4.   Increase the Minimum Pension Age (MPA) to 60 (for flexible access) to prevent early depletion of funds

From conversations across the industry and it appears their two broad camps exist. One in support of the full reach of the freedoms, with the clear upside for many. The other, as I am, proposing a check to this trajectory, mindful of the potential for significant downsides… the debate will continue.

 

David Brooks

Technical Consultant

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstoneltd.co.uk

Are annuities really dead in the water?

Retirement provision has traditionally been regarded as consisting of two distinct phases – accumulation (while you save money for retirement) and decumulation (when you use the money you have saved to provide you with your income and lifestyle in retirement).

 

Traditionally most people are more interested in accumulation and the tax reliefs available from HMRC. The focus of the recent budget proposals has been more on the decumulation phase. The biggest headline winner is that from April 2015, there will no longer be a need to purchase an annuity.  This has generated a huge amount of comment in the press, and is bringing about a lot of exciting advances from providers of financial products.

 

New financial products are being devised with the objective of combining the certainty of annuities with the flexibility of investment products. These offer innovative solutions, however we are of the opinion that the charges for these (especially in the formative years as there is less competition) could be a major factor for many people. 

 

Interestingly, annuities could still form a part of people’s retirement income plans, as it seems likely that many people will continue to seek the security of the guaranteed income they provide - particularly for example if they have a medical condition that can potentially entitle them to the increased income available from enhanced annuities.

 

What is clear is that on-going financial planning advice in both the accumulation and decumulation phases will be of importance for all to maximise the potential from their wealth.

 

 

Duncan Wilson

Private Client Partner

 

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

 

 

And there were gardens bright with sinuous rills

Over the last couple of days two statistics have been reported that we really should take note of.  Firstly, unemployment in the UK dropped to 7.1%. Quite apart from the fact that this is good news for everyone in work and seeking work, it is important because it is a another step closer to the 7% unemployment rate that Mark Carney, Governor of the Bank of England, has said would be one of the preconditions for an interest rate rise.  Secondly, the Government has published its findings that over the last year, take home pay has risen in the UK.  Finally today we have seen that growth in the UK is at its highest since 2007, with an annual growth rate of 1.9%.

 

 

More people in work, and people getting paid more is the rich soil in which the seed of inflation grows. The strimmer of inflation, to stretch my analogy further, is interest rates.  So we seem to have taken another big step closer to the interest rate rise that we have known is coming for some time.  Higher interest rates are bad for the prices of gilts and corporate bonds, better for savers, and importantly will be of great benefit to defined benefit pension schemes and those purchasing annuities. However, I personally don't think that interest rate rise is coming imminently.  The green shoots of economic recovery have only just started to appear and like the daffs in my garden could be easily snuffed out by an icy blast. In my opinion, growth needs to be bedded in before it is reined in.  Comments from the Bank of England and Vince Cable seem to bear this out with the Governor playing down chances of an interest rate rise yet.   So we might have several months of cheap money, lower unemployment, and economic growth ahead. Everything in the garden seems rosy....

 

Matthew Phillips

Managing Director

Telephone: +44 (0)20 7893 3456
Email: getintouch [at] broadstoneltd.co.uk