What is success?

The Government announced yesterday that 60,000 people used the pension freedoms and £1bn was paid from pension schemes to individuals since the freedoms were launched in April 2015. This is being hailed as a success by the Government, but is it?

This is an average pot size of c£17,000 being paid out. Of course it is likely there’ll be a range of payments across a bell curve of sizes but it is clear that this is something that will have impact on the smaller pot sizes. What could someone have done with a pot of £17,000 before April? Not a lot. Buying an annuity would have been the only option and a paltry income of around £560 pa would have been provided. So on the face of it those people may have benefitted from the changes, provided they use the money wisely now.

Some of these people may end up on state benefits, or be on state benefits. Taking benefits in a flexible way can result in the state acting as if you still have it or that you used it to buy an annuity. The upshot being that short-term spending of the fund could result a long term impact on the state benefits they could have been entitled too.

It is possible these “early adopters” were the many individuals delaying buying an annuity in anticipation of the changes and so while £1bn may seem a lot it was around the normal amount paid over a similar period to buy an annuity when that was the main option.

We don’t know what the tax take on this was, but when the Government talk about success it is surely with one eye on some more money into the coffers in income tax. It is also slightly different in the annuity days when £1bn would have remained locked away this has been released to spend. It would be interesting to see the impact on over 55s spending habits. What have they been doing with this money?

We also don’t know the ages of the people accessing these funds. Is it possible these are younger than the 65 year olds that access their funds. This early use of pension benefits, albeit small now, could have longer term ramification on those that in ten to fifteen years realise their pension funds are now too small to retire on as they used it to early.

So success or not? Success is a funny word to use when we only know the number of people and the number of pensions paid in total. Especially when the amounts mirror the pre freedoms world. People retire and need money to live on all the time. I accept it is politics but by any measure success surely cannot be determined yet. Have these people made use of Pension Wise? Have those that didn’t taken independent financial advice? Have they taken a wise decision? If yes, success. Have these people blown their nest egg too soon? Have they racked up a big tax bill? Have they inadvertently triggered the MPAA to their detriment? If yes, not successful I would say. Sadly, we may never know these answers before it is too late.

David Brooks

Technical Director

Telephone: +44 (0)20 7893 2262 

Email: david.brooks [@] broadstone.co.uk

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

Budget 2014: Getting Advice

It seems likely the retirement advice market will evolve into a two stage process.

Retirees will first need to learn about their options and the implications of those options. This will be the ‘guaranteed guidance’ much heralded by the Government. There are hundreds of thousands of people retiring each year and the Government wants each to have a face to face meeting so it is unclear how this will be delivered. But it will be free and impartial so prospective retirees should first take advantage of this offer when it is available. This should allow retirees to understand and perhaps come to a conclusion on the best option for them.

If their chosen option is more than hiking all the money out of their pension as soon as they can they may well need further advice on how to set up the Drawdown or which annuity to buy, what investments to hold and other such matters. This more specific advice is likely to be still carried by the qualified IFA community at a cost to the retiree. There is a danger that the first phase will encourage some to go it alone and no doubt some will make expensive mistakes.

It will be interesting to see how the FCA reconciles their current view of drawdown as a ‘high risk product’ with any new advice process.

Simon Nicol

Pension Director

Telephone: +44 (0)20 7893 3456

Email: contactus[@]broadstoneltd.co.uk