Pension savers will soon be able to take their entire fund as cash. But there will be no such freedom for those already retired – even if they have pitifully small annuities
Robert Parker: ‘I’ve always felt giving me 24p a month defied common sense – it is like something out of Gulliver’s Travels’
Robert Parker (pictured) was overjoyed when the Government said in March that it intended to allow savers to withdraw their entire pension funds as cash in retirement.
The former teacher, 70, has possibly the most parsimonious – and ludicrous – retirement contract in Britain. Every month he is paid just 24p by Guardian Assurance from a £300 subsidiary pension fund that was turned into an annuity a decade ago. If he could rescue the remaining cash, it would go towards helping his son-in-law, who is in remission from cancer, repair his car.
But Mr. Parker is one of millions of older savers who will be left the wrong side of pensions “apartheid” next year. The Coalition’s flagship reforms, which the Queen this week confirmed would be one of its last acts before the general election, will offer full discretion only to those yet to retire.
Consequently, an entire generation of pensioners will remain trapped in contracts that divide their funds into bite-sized monthly handouts.
Mr Parker, a Telegraph reader from Stetchworth in Cambridgeshire, said: “I’ve always felt allowing me 24p a month defied common sense – it is like something out of Gulliver’s Travels. But when I phoned after the Budget, I was told the payments were ‘set in stone’ and staff were quite dismissive. I hadn’t realised there was a caveat to the reforms, which now seem iniquitous and a gross injustice to my generation.”
Since the turn of the millennium, an estimated five million people have bought an annuity, which turns a pension into a guaranteed income for life. In the vast majority of cases the purchase was less a choice than an obligation, as the alternative, “income drawdown”, was deemed too risky for all but the wealthiest pensioners and withdrawals were almost always capped.
For some, the peace of mind from an annuity was ideal. But others, such as Mr. Parker, found the rules excessively prescriptive and leaving some savers open to exploitation. Vast numbers were directed into shoddy deals by insurers that put profit before all else. Around 150,000 people a year lost out, according to the Financial Conduct Authority, the City regulator. Tens of thousands more were sold annuities for “super-healthy” people despite suffering from illnesses that entitled them to an average of £1,350 a year extra from each £100,000.
Ros Altmann, a former Downing Street pension’s adviser, said: “Mr. Parker’s predicament shows how ludicrous the previous situation was. A lump sum would be far more useful than a few pence per week. It should be up to individuals to choose, rather than being forced to buy a product irrespective of its value. ”
Before the Budget, The Telegraph published a series of damning exposes of annuity injustices and called for reform. The work of campaigners, and the drastic fall in annuity rates from 15pc in the Nineties to 5pc today, led the Chancellor in March to propose the removal of any obligation to buy an annuity from April 2015.
A document introducing the Queen’s Speech, signed by David Cameron and Nick Clegg, said the move was “part of our wider mission to put power back in the hands of the people who have worked hard – trusting them to run their own lives”.
The Government said reform was possible because the state pension would rise to a flat-rate £155 for people who reach pensionable age from April 2016, reducing the danger of the profligate falling back on the state.
But existing pensioners are blocked from the new state pension. And neither will they have access to savings already used to buy annuities. The creation of pension “mega funds” that could boost returns by 50pc – another aspect of the Queen’s Speech – will also be for those still in work.
Annuity purchases were made irreversible because providers claimed that pooling risk and investing for the long term – both necessary to guarantee income – required lifetime commitment.
Steven Hynes, who is in his 60s, feels “shackled” to this discredited system. Like thousands of others, he bought an annuity in 2012 after being inundated with information claiming that the introduction of EU rules would cut male annuity rates by up to 30pc in January 2013. Yet insurers slashed rates early, locking worried savers into the lowest rates ever recorded.
“We were disgracefully short-sold,” Mr Hynes said. “There is no reason why people who have been given just one annual payment could not be given the opportunity to reverse their annuity agreement, with their fund debited of the payment already made.”
Roy Humphreys, who bought an annuity on his 65th birthday in December 2012, said: “Do I have to live with this enforced fiasco for the rest of my life? I saved hard, did the right thing for my future and lost out.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, said there was no “political appetite” to force insurers to unwind contracts. “Politicians might try to sweet talk life companies,” he said, “but they wouldn’t go any further than that with insurers’ balance sheets under pressure following the Budget.”
A Treasury spokesman said the Government had offered “significant support for pensioners” by ensuring consistent annual rises to state pensions.
However, there is a glimmer of hope for those locked into annuities. Insurers admit they make no profit from processing small annuities. One company, Phoenix Life, set a precedent last November by allowing certain customers to cash in annuities worth less than £2,000. Two thirds took up the offer. A spokesman for the firm said: “There is no legislation to stop providers from unwinding annuities, but it is not simple and took us months of work.”
The Association of British Insurers said savers should contact their provider to ask about escaping contracts
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