“While pension holders may be unhappy with the returns currently offered by annuities there has to be a big risk they will get a poor deal if they decide to take their money and run, for two reasons,” says Gareth James, AJ Bell Technical Resources Manager. “First, the cash lump sums offered may not be good value once the buyer of the annuity prices in the risks involved and their need to make a profit. Second, the extra freedom increases the danger people are misled by fraudsters and use the money to make unsuitable investments which provide a worse outcome than the annuity. Pension providers' control systems are designed to reduce this danger but once funds are withdrawn this protection is removed.”
Selection problems are also likely, with healthy individuals opting to keep their annuity and those in poorer health choosing to cash out. A first step, to test the proposal, could therefore be the setting of a cash threshold which permits the sale of lower-value annuities. If this provides more good outcomes than bad for savers then the option to sell could be made available to all annuity holders.