Pension firms are squirming as they watch their annuity businesses collapse after Chancellor George Osborne’s radical shake-up of the market in Budget 2014.
Osborne opened the door for anyone with a defined contribution pension to manage their own pension pot rather than buy in to an annuity.
As a result, more than 150,000 customers who were resigned to buying an annuity to provide an income from their pensions in retirement have pulled out of the deals in less than a week.
Many annuity firms offer customers a 30-day window to consider their deal before the contract becomes final, but thousands are already talking with their feet and ripping up their contracts.
The big financial firms listed on the FTSE100, like Standard Life, Legal & General, Prudential and Aviva have seen nearly £4.5 billion slashed off their stock market values as one of their most profitable sources of income goes down the drain.
Unpopular annuities
Their chief executives have formed a band of brothers to lobby regulators and government over the move to try and resurrect their evaporating businesses.
Both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) confirm financial firms have lobbied them about the reforms over the past few days.
Osborne’s pension proposals took the market and regulators by surprise.
The financial firms said they had no warning of the impending announcement beforehand, while the FCA had just launched a review of the annuities with a view of making the market fairer for consumers.
Annuities have been unpopular with retirement savers for many reasons over recent years.
Many pensioners claimed annuity rates gave them a meagre return on their savings while providers and advisers charged around £3,000 to arrange the contract whatever the size of a pension pot.
Trusted to manage money
With an average British pension fund of £38,000, many retirement savers were seeing almost 10% of their fund spent on nothing while the rest provided a 3% return of around £1,050 a year on top of the State Pension.
Many retirees were also angry that their annuity stopped paying out when they died and the money reverted to the insurance company – although the firms argue that this money is redistributed among other annuity holders and not kept by the company.
“The Chancellor thought it was fair that pensioners were trusted to manage their own money in the same way as those drawing benefits are,” said a Treasury spokesman. “They worked hard to save, so they should make the decisions.”
