Osborne's latest policy

Murphybear

It won't be happening, if at all, until April 2016, so plenty of time to iron out the wrinkles or set up the scams;)

I am one of those who took out a small annuity (£800 pa) just before they changed the rules, so will be watching this very closely

System

The pressure to introduce something like this is to mitigate the sense of unfairness felt by people who bought annuities with poor returns? But that cannot be rectified, because the return on the annuity was locked in at the moment of purchase - someone buying it will get exactly the same poor return as the first purchaser. So it will only be worth buying at a greatly reduced price compared with the original purchase.

DaveMcG

Clifford_Pope wrote: »

The pressure to introduce something like this is to mitigate the sense of unfairness felt by people who bought annuities with poor returns? But that cannot be rectified, because the return on the annuity was locked in at the moment of purchase - someone buying it will get exactly the same poor return as the first purchaser. So it will only be worth buying at a greatly reduced price compared with the original purchase.

Exactly. Replacing a "bad" deal with an even worse one.

I really can't see how the FCA can sanction this. When the sums are done, the consumer selling their annuity will be poorer than they were.

During the huge pension mis-selling review, any mitigation resembling "it was what the customer wanted" was disregarded as the calculations showed a loss. So what will be the compliant rationale for the sale of an annuity income stream?

de1amo

what is the parameters of the 5 million they mention?...İ was medically retired back in 1997 and at that time my annuity was bought and my pension started..İ am 52 now and this greatly interests me!

rpc

This has nothing to do with getting good value out of a cash sum in exchange for annuities.

This is a headline to win votes from the "but you made us buy an annuity" crowd.

jamesd

I agree that there is a political purpose but in general I'm content when a political purpose also has the purpose of making people better off. The take the money and defer the state pension case is one where that's entirely possible.

redbuzzard

The issue is one of value I think.

Pricing is crudely a function of the equivalence of a series of cash flows (the number being related to remaining life expectancy) with a capital sum, using gilt yields.

Nobody is going to buy or sell at that rate with the risk of the annuitants living longer than expected, or in the case of re-purchase, the selling annuitants dying sooner (even ignoring the fact that the ones most likely to sell will be the ones who don't think they will live the longest).

Given similar gilt yields, bearing in mind that gilts can be purchased with zero nominal risk if holding to maturity, the risk cost/premium is going to be substantial.

On Saturday's Money Box on Radio 4 an actuary, Chris Noon (sp.?) gave an example of a man who bought an annuity 5 years earlier of £3600 p.a. for £50,000. He said that the man should now be able to sell the remaining income for £58,000 before charges and expenses because interest rates have fallen and longevity has increased [i.e. annuities are now more expensive to buy so worth more to sell].

Alan Higham, Retirement Director at Fidelity, disagreed and compared this approach with pricing an antique you wanted to sell by looking at what antique shops sell them for.

He said, to paraphrase, that the value would be nowhere near £58,000 and that while putative EU regulation might imply a figure of £45,000, his own estimate would be £35,000.

He made an interesting point re double taxation. If the income from an annuity is taxable, that implies that the purchaser would have to allow for tax on the payments, so to tax the seller on the capital returned would be illogical. On the other hand, if the seller were to be taxed on the proceeds, then the purchase should receive the payments tax free.

He also observed quite correctly that a potential seller can evaluate an offer as an interest rate on a loan. If you have a life expectancy of 15 years, thats 180 payments of your annuity income viewed as repayments of the money you get for your annuity. Easy to do with a financial calculator, or a loan widget on the internet for anybody who hasn't got one.

I've linked the Money Box programme above for anyone who wants to listen to it - the de-annuitisation bit is less than 10 minutes at the start of the programme.

DaveMcG

jamesd wrote: »

I agree that there is a political purpose but in general I'm content when a political purpose also has the purpose of making people better off. The take the money and defer the state pension case is one where that's entirely possible.

But that would be an extremely niche market of those have taken an annuity, are not yet at state pension age and do not have any other savings to fund the deferment.

N1AK

redbuzzard wrote: »

On Saturday's Money Box on Radio 4 an actuary, Chris Noon (sp.?) gave an example of a man who bought an annuity 5 years earlier of £3600 p.a. for £50,000. He said that the man should now be able to sell the remaining income for £58,000 before charges and expenses because interest rates have fallen and longevity has increased [i.e. annuities are now more expensive to buy so worth more to sell].

I doubt many people are shocked to see that this is more about announcing something that sounds good to recent retirees than actually doing something useful.

Who on earth would invest £58k to get £3.6k pa for as long as someone else, who has been retired for 5 years, lives? If we take ridiculous assumptions (the person is now 60, you could only earn 2% on the capital if you kept it, running your business is free) then they'd have to live to 86 on average for it to break even.

Frankly I'm just glad they haven't, yet, announced that their going to use more taxpayers money to buy off pensioners. I was expecting them to announce that the government would buy your annuity off you at some inflated value...

jamesd

DaveMcG wrote: »

But that would be an extremely niche market of those have taken an annuity, are not yet at state pension age and do not have any other savings to fund the deferment.

It also includes those who are older than state pension age. The deal for them on deferring is less good as they get older but they also have the option to spend up to £25,000 to buy more state pension later this year and that deal is better for those who are older. Both 10.4% for those who reach or reached state pension age before April 2016 and 5.6% for those doing it after look good compared to normal annuity rates today.