The government will let you cash-in your annuity: but it could cost you

Pensioners will be handed new freedoms to turn their retirement income into cash the Treasury has announced, but it could lead to financial disaster according to several experts. The government said that it will allow around 5 million people to cash in their annuities from April 2017.

It will do so by scrapping tax restrictions on annuities, which currently means those wanting to sell their retirement income face a 55 per cent charge, or even up to 70 per cent in some cases.

Explaining the planned change, Pensions Minister Ros Altmann said: “Some people were forced to buy annuities in the past that may not have been suitable for them. This reform will allow more people the opportunity of a more flexible income stream.

She said some may want to sell an annuity to get cash to help relatives or dependants or because they need money to cope with a change in circumstances. But she admitted that: “For the vast majority of customers, selling an annuity will not be the best decision.”

It’s the latter point that has been seized on by critics of the move. They warn that the change opens the door to millions making a financial mistake by flogging a guaranteed income in return for an immediate lump sum that will be much less than they would end up with by sticking with their annuity.

Former pensions minister Steve Webb, who launched the wide-ranging pensions freedoms that came into effect last April before losing his seat in May’s election, warned that vulnerable older people could be worst hit by the change.

“There is a real risk of poor outcomes if people on low incomes sell their annuity only to discover that the DWP treats them as if they were still drawing that income,” said Mr Webb, now director of policy at Royal London.

Meanwhile Alan Higham of Pensionschamp.com accused the government of prioritising “political ideology over people’s real needs in retirement”. He said the change would “benefit few consumers while exposing many to significant risks”.

he’s calculated that someone aged 75 who bought an annuity 10 years ago with £100,000 would be receiving on average £7,000 a year from it. If they were to sell it and were in good health they’d get around £56,000. If that sounds an attractive figure, bear in mind that the seller would lose out if they lived for another nine years. It’s also worth noting that official figures estimate an average healthy 75-year old will live for another 12 years.

“Some healthy 75-year olds could easily live to 100 given increased life expectancy and giving up 25 years-worth of money for eight years looks a very bad deal by anyone’s measure,” warned Mr Higham.

The freedom to cash-in an annuity will be welcomed by unscrupulous crooks who’ve already fleeced many people since the wider pensions freedoms came into force in April. “Rogues and fraudsters have already taken millions from people by cashing-in on confusion about pension freedoms,” warned Sarah Pennells of SavvyWoman.co.uk.

The government has anticipated this up to a point and plans to ensure that there’s financial advice or guidance for those thinking of selling their annuity. But there’ll be a cost for advice which will eat into people’s pensions pot. The existing government-backed Pensions Wise guidance service has also proved fairly ineffective in stopping people falling into the hands of con artists.

However the key question for anyone tempted by the chance to sell their annuity is how would they cope with the loss of income? Not just in the year they sell, but in every year for the rest of their life.

In any event, the amount offered by a buyer may be much less attractive than an annuity seller hopes, especially if there are health issues. That’s food for thought before the changes come in in April 2017.