Millions of retired people who missed out on the pension freedoms because they had already swapped their life savings for an income-generating investment could soon join the rest of the over-55s in gaining direct access to their money. However, some will need to pay about £1,000 to unlock their cash, according to new Treasury rules, and could be disappointed with the sum they receive.
Those who bought an annuity — which is paid for with pension savings and buys an income for life — have been unable to benefit from the changes made in April allowing people to draw directly from their pension savings. In the autumn statement last month, the government confirmed that it will allow a secondary market for annuities for the first time, permitting annuity holders to end their contracts and regain some of their savings.
This week it emerged that conditions would be imposed to force some annuity holders to take financial advice before selling an annuity, after concerns that, without the help of an expert, savers could easily fall victim to scams.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, says: “Without suitable measures it could be too easy for investors to end up selling-on their guaranteed incomes for rock-bottom prices. The critical question now will be where the Treasury sets the threshold for mandatory advice.”
While the cost of advice is likely to exceed £1,000, the money spent on advice could be money well spent.
Adam Price of Vouchedfor.co.uk, the adviser-review website, says: “Getting independent financial advice tailored to their situation represents the minimum due diligence that they should undertake.”
The secondary annuity market could pay out small amounts in return for annuities, warns McPhail.
He says: “Existing annuity holders may in some cases be disappointed by the relatively low sums they are offered in return for their existing guaranteed income.” McPhail adds that the new marketplace should come with strict policing of the way in which contracts are sold, to protect pensioners from overselling.
He says: “The secondary annuity market can work well for consumers, provided insurers are prevented from directly buying back their own policies, because this would risk investors losing out.
“Market competition through annuity brokers, combined with appropriate consumer safeguards, should ensure the market will work well.”
Further details of how to sell an annuity will be included in the government consultation response that is expected this week.