Out-Law News 2 min. read
19 Nov 2014, 3:01 pm
Financial secretary to the Treasury, David Gauke, said that there could be "unfair outcomes" for industry if the government forced annuity providers to allow savers to exit existing contracts with them.
From April 2015, the government intends that those aged 55 or over will be able to access their defined contribution (DC) pension savings in whatever form that they wish, without necessarily having to purchase an annuity, subject to their marginal rate of income tax. A new Taxation of Pensions Bill, which would facilitate the changes, has been introduced before parliament.
Gauke made the comments during the committee stage of the parliamentary process of passing the bill in which Labour MP Pamela Nash had asked whether the government would allow pension savers to exit from annuity contracts they entered shortly before chancellor George Osborne announced in March plans to give pension savers greater freedom with what they could do to access their pension pots at the point of retirement.
Nash questioned whether the government should have made it "mandatory for the companies providing annuities" to give annuity buyers "flexibility" to exit from those arrangements.
Gauke, who took part as a witness to proceedings, said: "One can understand and sympathise with people’s frustration, but one has to draw a point in time where the flexibility comes into place. Inevitably, if you draw a point in time there will be those who fall just before that point. It is extremely difficult to try to unravel contracts that have been entered into."
"Because the providers had entered into contracts and would have made investment decisions as a consequence of their position at that time, a mandatory system as opposed to a voluntary one may well have caused a number of difficulties and some unfair outcomes. The approach we took, in terms of doing everything we could to facilitate and help consumers caught in that position while working with the industry on a voluntary basis, was a sensible and pragmatic response to the situation," he said.
An annuity is a policy from an insurance company that converts a pension fund, or part of a pension fund, into a regular pension income.
Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that it would be difficult for insurers to price annuities if individuals could "cash them out at any point".
"Although some insurers might choose to offer annuities in the future that could be cashed out for an additional premium, it doesn’t make sense to wish to unwind annuity contracts that individuals have already signed up to," Tyler said.
Last month, pensions minister Steve Webb said he wanted to give retirement savers the ability to exit from annuity arrangements entered into prior to Osborne's March 2014 Budget announcement on pensions reforms. Webb, a Liberal Democrat MP, said he would explore the plans further with his own party, rather than try to bring about changes prior to next year's UK general election under the coalition government.
Earlier this year, Webb outlined his support for measures which would help annuity buyers to switch more easily between annuity products.
"When you take out a mortgage, in a few years if rates change you can switch your mortgage," said Webb in an interview with the Sunday Telegraph in January. "But when you take out an annuity, that's it - for life. This could easily be for a quarter of a century. Why shouldn't you be able to change your annuity provider so a few years later somebody else could offer you a bigger pension? Why shouldn't you be able to shop around?"