The Financial Conduct Authority has just closed its consultation on proposed rules and guidance that would allow pensioners to sell their annuities for a cash lump sum.
The Money Charity opposes this change and argues that if it is introduced, it should come with a clear, up-front warning that selling your annuity will leave you in a worse position – unless you live a much shorter life than you’d hope.
In 2014, ‘pensions freedom‘ was introduced, allowing people over 55 to take their pension pot and convert some or all of it into a lump sum rather than a guaranteed income. A secondary market would allow those who have already bought an annuity to have a similar kind of freedom – to trade in a set income for the rest of their life for a lump sum.
Those who take advantage of existing pension freedoms will make decisions that may leave them in a worse position than if they had bought an annuity. But the flexibility of the lump sum will allow many others to be better off in retirement. By contrast, consumers who choose to sell their annuity face paying fees twice and will be in a considerably worse financial position on average.
Many of us become vulnerable, dependent, or lose mental capacity in the last years of life. So allowing pensioners who have a secure guaranteed income to trade it in for a short term gain exposes them to risks of financial insecurity.
In a phenomenon researchers call hyperbolic discounting, the vast majority of people are tempted take short term gains like this over longer term security.
It does seem that the Treasury and Department for Work and Pensions are pushing ahead with the policy despite widespread opposition.
In our response to the FCA’s consultation we argue that in order to mitigate the clear risks involved, strict rules including up-front warning of probable loss must be introduced.