Freedom is a wonderful thing, so what’s not to like in Chancellor George Osborne’s plan to grant freedom to the five million pensioners who have locked into an annuity?
They certainly deserve all the support they can get, given the dismal annuity rates of the past five years.
But Mr Osborne’s offer is likely to make a bad situation even worse for many of those who accept it, and possibly the rest of us as well.
Cry Freedom
Under the proposals, pensioners will be able to sell their annuity income for cash, without unwinding the original contract.
They can either spend the money on whatever they like, or re-invest it in income drawdown.
The proposals, if they happen, will come into force from 6 April 2016. And a thoroughgoing mess will ensue.
Income For Cash
Some people may well benefit from cashing in. They might want a lump sum to pay off debts or help children onto the property ladder.
Those with several personal and company pensions will be glad to exchange one of them for a cash lump sum.
And for those with tiny annuities, I can see the temptation of taking £1,000 today rather than £10 a month phased across the rest of your life.
Price Of Freedom
But for many others, it will prove a mistake.
First, it seems likely that people who want to cash and will be obliged to take independent financial advice. That will cost money, which will come from their pot. And there will inevitably be charges to cover the cost of converting their annuity.
Remember, they are paying charges twice: when they took their annuity out, and when they cash it in again.
Smaller annuities could shrink to nothing.
Mean Test
Politicians are only just waking up to the biggest problem of all. And this affects everybody.
The reason we have were all corralled into annuities in the first place is that politicians didn’t want us to blow our pension pots, then fall back onto means-tested state benefits.
Now we will have the opportunity to do just that.
Suddenly waking up to the problem, Ministers talk about banning the 650,000 pensioners who receive means-tested pension credit and housing benefit from selling their annuities.
Which is daft, given that these are exactly the people who will be most likely to want to cash in their annuity.
But what will they do about people who need to claim means tested benefits in future, after taking their annuity as cash than blowing it?
It is hardly fair to expect taxpayers to foot the bill. But if we don’t, how will they eat?
Everybody agrees that Mr Osborne’s Budget made great politics, but the economics of it look worse by the day.
