A ray of hope for savers stuck with meagre annuities

Insurance giants vow to try to help them get lump sums after our campaign

MAJOR pension companies are investigating ways to let savers cash in their small annuities, Money Mail can reveal today. Following our hard- hitting campaign, several firms have launched reviews that could give an instant cash boost to thousands of pensioners.

Late last year, the Government disappointed five million retirees by cancelling plans to let them sell their annuities, which pay a regular monthly income, for lump sums.

Older savers had effectively been forced to buy these deals, often at rip-off rates, to get at their money set aside for old age.

The Government’s U-turn created a divide between the generations: while older savers had to continue living on small monthly incomes, younger ones were able to use new so-called pension freedom rules to withdraw their life savings in one go.

Money Mail’s Unlock Our Pensions campaign called for these freedoms to be extended to people in retirement.

We wrote to chief executives of the largest pension firms after discovering a little-known law that allows savers with annuities worth less than £10,000 to cash them in — if their provider agrees. And, to their credit, we received a terrific response.

The bosses of Prudential, Scottish Widows, Legal & General and one other major insurer, who wished to remain anonymous, say they have launched reviews to find a way to help customers cash in.

Some say they need guidance from the City watchdog before they start paying out, but industry insiders warn that the Financial Conduct Authority will publish these crucial rules only if the Government issues a statement giving the green light.

In a letter to Money Mail, Clare Bousfield, chief executive of Prudential UK and Europe insurance, writes: ‘We are continuing to explore ways we could make lump- sum payments to those customers who have small annuities.’ She says making the change would be a ‘significant undertaking’ and would require ‘thorough analysis’.

‘We would need to ensure, for example, that no other customers were adversely affected by the financial impact of introducing trivial commutation [cashing in your pot],’ she says.

‘And we would need to develop a clear process with effective support for any customers wishing to take that route.

‘We are therefore undertaking a detailed review . . . to make an informed decision. I am hopeful that the outcome will be positive.’ ANTONIO LORENZO, chief executive of Scottish Widows, says: ‘We are continuing to consider options and determine whether we could enable customers with small annuities in payment to sell them back to us.’

The reviews represent major progress for our campaign because most firms had at first appeared reluctant to help customers.

Hundreds of savers locked into rip-off rates have written heart-rending letters explaining that a lump sum would be far more useful than the monthly income they receive, which can be as low as £1.

Over the past few months, Money Mail has held discussions with senior executives in the industry, explaining how they can help. nearly all the bosses agreed that, in principle, annuity customers should be able to have their cash back if a lump sum would make a bigger difference to their lives.

A sticking point is that annuities were sold as lifetime deals, and unwinding the contracts would be expensive — a cost that would be likely passed on to customers.

Pension firms are also worried about the lack of guidance on how to calculate the payouts. Money Mail has suggested firms give back the amount customers originally put up to buy the annuity less any monthly payments received.

But firms say this would not work because of the complicated investments they have made and the way these are valued on their balance sheets.

They also want clarification on how to treat customers with joint-life annuities, which continue to pay out to a spouse on death. Firms fear claims from bereaved partners if they allow these deals to be cashed in.

It’s for these reasons that not all insurers are so enthusiastic.

Phil Loney, chief executive of Royal London, says the company would ‘not be able to offer good value’, and adds: ‘We do not believe it would be appropriate to enter into such transactions.’

Keith Skeoch, chief executive of Standard Life, says he has ‘no plans’ to allow savers to cash in due to the risks. Customers ‘would not be well placed to determine the value’ of any offer and would not have the opportunity of looking for a better deal.

Chris Knight, a director at Legal & General, says: ‘This [legislation] does not override the terms and conditions of annuity policies, which typically state that annuities cannot be cashed in once purchased.

‘A key challenge is that we cannot easily determine, without individual underwriting, whether a customer’s future annuity income will be valued at less than £10,000.’

He says this is because the firm must estimate a customer’s life expectancy to work out how much their guaranteed income is worth.

For example, a customer with an annuity of £5,000 a year could have medical conditions resulting in a shortened life expectancy of less than two years, so the annuity would be worth less than £10,000.

But a healthy customer with a £500-a-year annuity may have a life expectancy of more than 20 years, so the annuity would be valued at more than £10,000.

‘We continue to work with others to find solutions to these challenges,’ says Mr Knight.

Meanwhile, an Aegon spokesman says it is not planning to let customers cash in small pots because it believes all savers should get advice, and that would not be cost effective for those who might get only a few hundred pounds back.

‘While there may be a small number of individuals who are disappointed by this, our decision has been taken to protect the interests of our overall customer base,’ he says.