Budget 2015: annuity sales are pointless if poorest can't use it

Stacks of coins on graph paper background with red arrow.

Pensioners who already cashed in their pension pot for an annuity have been told they can join in the pension freedom fun by simply selling it, but in reality the option won't be open to everyone.

Chancellor George Osborne used his last coalition Budget to announce pensioners – many of which were angry that they could not access their pension as cash like new retirees will be able to – will in fact be able to cash in their annuity, essentially swapping their income for a cash lump sum (minus the income tax of course).

There are five million pensioners and in 2013 annuities paid out £13 billion – that's a lot of income that people could potentially give up.

While most experts believe giving up a guaranteed income for life (which an annuity provides) is a bad idea there are cases where it may make sense; namely those who had such small pension pots in the first place that they are receiving a couple of pounds a week.

However, there is a slight problem. Those who have the smallest annuities are likely to be some of the poorest people in the UK, possibly relying on the state pension to fund most of their retirement income and even other benefits – such as housing benefit and pension credits.

The government has said it will consult on whether 650,000 pensioners receiving means-tested benefits should be blocked from accessing their annuity because it does not want to pensioners who cash in any size annuity to fall back on the state for help.

Pointless exercise

While I understand that the government does not want people blowing their pension pots and then asking the state to keep them in old age, it seems pointless to introduce annuity sales and not let those who will benefit the most from it from accessing it.

If a person is receiving £200 a year from their annuity which they bought with a £10,000 pot, it could be argued that £200 a year isn't going to make a difference to their lives or the costs to the taxpayer but allowing them access to their original sum could be life changing.

Surely it's just as, if not more, dangerous to let people with larger annuities access their money and spend the lot, increasing the number of people who are reliant on state benefits in old age?

And what constitute blowing the pot – will the government decide what a person is and isn't allowed to spend their money on and will people be penalised if they lose their money in a stockmarket downturn?

Annuity selling may be a vote winner but it isn't a practical idea if the people who could benefit most from it are prevented from using it.

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