Buck Bond Group

Why Cashing in Your Annuity is Wrong

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Cashing in your annuity – like a riot in a multi storey car park, wrong on so many levels!

In case you have failed to notice its election year.  MPs worried about their own, or their colleagues’ ability to keep their parliamentary seats, throw caution to the wind as electioneering gets into full swing.

The story in the Daily Telegraph that Pensions Minister Steve Webb wants pensioners to be able to trade in their pension, heralds the start of the silly season which starts now and will not end until the polls close in May.  It’s a great sound bite “I want to see people [elderly voters] trusted with their own money where ever possible”  says Steve Webb.  There are five million pensioners [voters] in the UK who having taken an annuity when they retired cannot currently cash them in for an upfront lump sum. But is exchanging a mortality linked income stream for a cash lump sum such a good idea for many elderly people?

This policy is unlikely to see the light of day, Steve Webb admits it cannot be done before the election and would require the Lib Dems to be in coalition with one party or the other following the election. It is also not as good an idea as it sounds when you look under the bonnet.  Providers of annuities are unlikely to want to take on any great risk in cashing in their policies, so the terms  of any cash in are in all probability not going to be good for pensioners.

Moreover pensioners have a better idea of their life expectancy than providers, and the unhealthy, or sick, may be more tempted to cash in their pensions.  As providers work on averages, this would affect the rates given for cashing in annuities and annuity purchases generally.  That’s before stories of relatives pressurising the elderly to cash in their pensions appear in the Sun newspaper. I can also hear the pension scammers, and those advertising dodgy investments in exotic locations, rubbing their hands with glee as opportunity knocks for them to con a few more elderly people out of their life savings.

Allowing pensioners to cash in their pensions also raises the possibility of trustees in bankruptcy being able to force pensioners to cash in their pensions for the benefit of creditors, leaving bankrupt pensioners dependent on the state for benefits.

I am a supporter of the general pension reforms being introduced this April to give those retiring greater flexibility and control over their pension savings.  However, where people have already retired and taken an annuity, and now have guaranteed payments for the rest of their lives, I am less convinced that they should be allowed to revisit that decision in some cases decades later, when they may not be as mentally alert as they were at retirement.