Proof in­sur­ers can give back an­nu­ity cash (if they want!)

Daily Mail - - Money Mail - By Dan Hyde d.hyde@dai­ly­

TO­DAY, Money Mail re­veals how in­sur­ers can give savers back the cash they in­vested in an­nu­ities.

More than five mil­lion pen­sion­ers are cur­rently blocked from cash­ing in their pots be­cause they were sold life­time con­tracts.

Last week, we dis­closed that ma­jor in­sur­ers, in­clud­ing Pru­den­tial, Scot­tish Wid­ows and Le­gal & Gen­eral, were in­ves­ti­gat­ing ways to let pen­sion­ers ex­change their small monthly an­nu­ity in­comes for one-off cash lump sums.

How­ever, their bosses warned it would be dif­fi­cult to un­pick these life­time deals — and some even ruled it out.

Yet proof ex­ists that it is pos­si­ble — be­cause one in­surer has al­ready paid out to large num­bers of cus­tomers.

As part of Money Mail’s Un­lock our Pen­sions cam­paign, we have ob­tained the de­tails be­hind a scheme run in 2013 by Phoenix Life to let sev­eral thou­sand cus­tomers cash in tiny an­nu­ities.

It is the first time the story be­hind the scheme has been told — and, cru­cially, it pro­vides a blue­print that Phoenix says all in­sur­ers could copy.

To pay out, Phoenix used the Govern­ment’s so-called small pots rules, writ­ten in 2012, to al­low savers to cash in two pen­sion pots worth up to £2,000 each. These rules still ex­ist and, to­day, let you cash in up to three pots, worth as much as £10,000 each.

The giant in­surer wrote to 7,000 cus­tomers, ask­ing if they would like a lump sum in­stead of their monthly in­comes.

Let­ters de­tailed how much savers would get and stressed the of­fer was op­tional.

re­cip­i­ents had all bought an­nu­ities with less than £2,000 and some were re­ceiv­ing as lit­tle as a few hun­dred pounds a month.

Phoenix re­alised that, to some, a lump sum would be more use­ful for things such as pay­ing debts and home re­pairs. Cus­tomers were given six weeks to de­cide and 65 pc asked to cash in. The pay­outs were sub­ject to in­come tax like other earn­ings.

Phoenix ex­plained to cus­tomers that they were giv­ing up guar­an­teed life­time in­comes, which, even if small, might be im­por­tant for cov­er­ing bills.

The of­fer was made to peo­ple aged be­tween 60 and 85. This age limit was set over con­cerns that very el­derly peo­ple might be less able to make an in­formed choice about a big fi­nan­cial de­ci­sion.

other in­sur­ers could adopt this ap­proach to al­lay ex­ec­u­tives’ con­cerns.

To work out the amount to hand back, Phoenix cal­cu­lated how much the com­pany had set aside on its balance sheet to pay a cus­tomer an in­come for the rest of their life.

This was done us­ing av­er­age life ex­pectan­cies.

Phoenix did not take into ac­count in­di­vid­ual cir­cum­stances and health be­cause the an­nu­ities it was pay­ing out were stan­dard con­tracts, not en­hanced deals tai­lored to the cus­tomer.

Some in­sur­ance bosses have claimed they would have to con­duct health checks to work out pay­outs — but Phoenix says this is not nec­es­sary.

The ma­jor­ity of pen­sion­ers had stan­dard an­nu­ities be­fore pen­sion free­doms were in­tro­duced in 2015, so most firms could use the same meth­ods to cal­cu­late fair pay­outs, says the com­pany.

Phoenix in­cluded the cost of ad­min­is­tra­tion and set a fi­nal fig­ure for each cus­tomer, fac­tor­ing in their age and how long they had been tak­ing an an­nu­ity in­come.

Cru­cially, the scheme helped re­duce Phoenix’s costs. This should en­cour­age the chief ex­ec­u­tives of in­sur­ance firms, some of whom have com­plained that pay­ing an­nu­ities would be too ex­pen­sive.

Phoenix says it saved money be­cause it no longer had to ad­min­is­ter as many small monthly pay­outs. Danny Dowd, head of re­tire­ment propo­si­tions at Phoenix, says: ‘The big driver be­hind the of­fer was that this could ben­e­fit our cus­tomers, giv­ing them more op­tions in re­tire­ment. We saved a small amount of money, but that wasn’t the main mo­ti­va­tion.

‘ The num­bers speak for them­selves in terms of how much cus­tomers ap­pre­ci­ated the of­fer. We made it clear that it was op­tional, and more than six in ten still took the deal.

‘It was a pos­i­tive thing to do and was well re­ceived by our cus­tomers.’

Phoenix is con­sid­er­ing re­peat­ing its scheme. ‘We are still think­ing about whether we could do this again, but we don’t want cus­tomers to cash in an­nu­ities that are of­fer­ing them good value in re­tire­ment,’ adds Mr Dowd.

It took Phoenix three months to de­vise the plan in 2013, and Mr Dowd says pen­sion rules are now more com­pli­cated.

one wrin­kle is that cus­tomers are now al­lowed to cash in £10,000 by law if their com­pany al­lows it, up from £2,000.

With more money in­volved, ‘more con­sumer pro­tec­tions’ need to be put in place, says Mr Dowd.

These could in­clude more prom­i­nent warn­ings spell­ing out that savers could face tax bills, lose state ben­e­fits and valu­able in­come streams a spouse may have in­her­ited.

Mr Dowd says: ‘ I be­lieve other in­sur­ers may be able to do some­thing like we did, but they will need to pro­tect their cus­tomers’ in­ter­ests.’

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