WITH just months left in power, the coalition government is fast running out of opportunities to create fresh misery for savers, writes Jeff Salway
The vibe coming from Westminster, however, is that it doesn’t intend to let up quite yet – hence Steve Webb throwing another half-baked idea into the pensions reform pot.
Like the reforms set out in last year’s Budget, which from April will give people greater freedom with their pension savings from the age of 55, Webb’s proposal gives unscrupulous firms yet another chance to rip off ordinary savers.
The pensions minister wants people who have already bought annuities (and who therefore won’t be able to take advantage of the new freedoms) to be able to sell their annuity in exchange for a lump sum.
So far, so good, as long as you don’t think too hard about the temptations of a lump sum to someone who needs cash and is prepared to sacrifice their guaranteed retirement income.
But then it gets more complicated. Anyone with an annuity has already sacrificed a chunk of their pension savings to their annuity provider, in the form of direct and hidden charges. If they choose to sell it on they’ll be forced to deal once more with firms that in many cases are willing and able to exploit them. One option would be to sell their annuity back to the provider in the hope of getting something like a fair price for it. This is an industry, remember, where providers enjoy margins upwards of 20 per cent on new annuity business. They won’t have any difficulties finding a way to create margins on second-hand annuity business, at the considerable expense of their customers.
Another danger would arise from pensioners selling their annuities to third party investors. Then we’d be just a step away from second-hand annuity investment products being developed along similar lines to life settlement funds. The regulator issued yet another warning over life settlement funds just a few months ago, having previously described them as “high-risk, toxic products”.
That’s just a glimpse of the potential consequences of Webb’s proposal. It can only work safely if advice is made compulsory for anyone selling their annuity, but that’s not going to happen. And without advice, the chances of the average saver getting a decent deal are slim. It’s not that people can’t be trusted. It’s more that few have the financial capability to successfully navigate an increasingly treacherous pensions minefield.
The Financial Conduct Authority already faces a virtually impossible task in bringing regulation into line with the new pensions landscape in time for April and it’s desperately playing catch-up. The last thing it, and therefore the consumer, needs is yet more messing about with the system.
What regulators, firms and pension savers do need right now from Steve Webb is a focus on ensuring April’s shake-up doesn’t leave too many people up the proverbial creek.
Webb has been an excellent pensions minister, but he’s also a politician with an election on the horizon. Votes take priority over voters once a campaign is under way, with often disastrous results.
By bringing millions of existing annuity holders into play, Webb’s proposal would give the scammers and the unscrupulous an even bigger target to aim for.