In March 2015 the UK government said it saw “no reason” to prevent people who had already bought an annuity from selling it in exchange for a lump sum. There were in fact an awful lot of reasons why it would be a bad idea, hence last week’s announcement that plans for a second-hand annuity market were being scrapped.
What’s unfortunate is that a lot of people were very keen to sell their annuities and they are entitled to feel angry at being denied an opportunity they thought would soon be theirs. But the papers raging about “millions of pensioners” being left “high and dry” by the government have been denied a far bigger scandal to cover.
Secondary annuities were a reckless and stupid idea by even George Osborne’s standards. The costs (including exit fees, commission and underwriting fees) and tax would have wiped out the value of all but the largest annuities being sold. Sellers would have lost up to 30 per cent of the value of their annuity to transaction and admin costs alone, according to the Open University Business School.
The government was forced to abandon the project by a rare consensus among regulators, providers and consumer groups that the market was a disaster in the making. Which raises the question as to why it got so far.
The relief at the government’s decision was matched by the surprise that they had done the right thing for once. So much coalition and Tory policy-making has been made on the hoof without any thought about the long-term consequences. The EU referendum is the most obvious example, but the pension “freedoms” belong firmly in the same category.
Recent pensions policy has been about flexibility and letting people take responsibility for their own decisions. It’s a flawed proposition in an area as potentially complex as pensions. The long-term savings industry is on a journey towards transparency and fairness, but there’s a long way to go. Letting people fend for themselves in that environment is only going to work well for the finance industry, particularly where the individual doesn’t have professional advice.
In contrast, automatic enrolment – a Labour government scheme implemented by the coalition – is proving a qualified success. With just one in ten people exercising their right to opt out of the workplace schemes they’re being enrolled into, millions are saving for retirement for the first time. Contribution levels need to increase and eligibility needs to be widened (such as to the self-employed), but automatic enrolment is working.
The abandonment of secondary annuities is a rare but welcome acknowledgement that when it comes to long-term financial security, history suggests there’s a lot to be said for not leaving it all to the individual.