Sometimes doing what is viewed as the wrong thing, is so right!
One of the great things about living in the UK is the capability for freedom of speech, however, not all of us have the same platform in which to air our opinions.
Stephen Glover, a columnist for the Daily Mail, was indignant last week when the Treasury announced that it was not going ahead with plans for a secondary annuity market. Mr Glover has every right to his own opinion but his article did not represent the facts evenly or correctly.
He states that the freedoms announced by George Osborne when he was Chancellor were to extend to individuals that had already purchased an annuity. Allowing them to cash in those annuities if they wanted. Mr Glover questions “by what right has the Treasury to withdraw such a solemn pledge?” He later fumes “it is surely outrageous that five million people should be locked into annuities from which they had been led to believe by the Government they would be able to escape.” What Mr Glover conveniently forgets is that when the majority of those five million people purchased their annuity they were told that once purchased it was not possible to alter the arrangement.
An annuity guarantees to provide a level of income, which can increase, for the rest of your life, regardless of how long that life is. Life expectancy continues to increase, both men and women are very likely to celebrate birthdays in their 80th year and the number of centenarians is growing every year. This means that annuities could easily be paying income for more than 20 years.
Once an annuity has been purchased there is no risk regardless of stock market crashes, political uncertainties, you can rest assured that your income will continue.
Mr Glover goes on to say “that doubtless there are genuine technical challenges in making this scheme work but where there is a will there is usually a way. I’m afraid that neither government nor the industry wants this to happen. The melancholy truth is that the shameless insurance companies, which have often offered abysmal returns will only play ball if they can extract a 20% cut. It’s called daylight robbery!”
It is important to realise that annuity rates are based on 15 year gilt yields not some arbitrary figure dreamt up by an insurance company. If you purchased an annuity 10 years ago, in 2006, the 15 year gilt yield was 4.4% at that time the Bank of England base rate was 5%. Fast forward to today and 15 year gilt yields have dropped to 1.45% and the Bank of England base rate is 0.25%. If you were one of the ‘unfortunate people’ who purchased an annuity in 2006 and have been receiving your annuity income based on a 4.4% rate, to me that seems like good value for money when interest rates are now less than 1%.
Whilst I agree that should interest rates or inflation rise above 5% in the future you may not feel so fortunate, however, the long-term view is that rates will remain low for many years to come.
The other factor that Mr Glover fails to mention is that to have a secondary annuity market you need people that are willing to purchase the old annuities. Unlike the once buoyant secondary endowment market where a purchaser paid a single premium knowing that on a certain (maturity) date they would receive a lump sum and should the original owner die prior to the maturity date that there would be a death benefit payout. With a second-hand annuity the purchaser would only receive the annuity income for the life of the original annuitant, how long will that person live? If there was a way of telling this it would make financial planning so much easier for all of us. So how would it be possible to put a fair price on the value of that annuity?
I believe that a secondary annuity market was never something that would work in practice, the annuitant would have been disappointed with the repurchase offer made by an insurance company and for anyone that purchased a second-hand annuity the risk would be too great for the price paid, which would have resulted in unhappy members of the public who would have complained that the financial services industry had ripped them off.
On this occasion I think that the government, backed by the Association of British Insurers, have got it right, they have considered the consumer and the industry and realised that the secondary annuity market was destined to fail.