Five million retirees trapped in poor paying annuities will have the chance to pull out of the deals under new rules Chancellor George Osborne will announce in Budget 2015.
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Osborne has confirmed that he is introducing a new law that releases the grip of financial firms on retirement income by extending flexible access pension reforms to annuities.
The full details of his proposals will be published with his Budget 2015 speech on March 18.
He plans to remove any restriction on annuity contracts so pensioners locked into contracts can buy or sell annuities as they please without breaching the original contract.
Many financial experts and pensioners have complained that their fixed income from annuities has suffered as interest rates and the yield of gilts have slumped in recent years.
The income from an annuity is a lifetime contract with returns based on the value of gilts.
Financial freedom
Once agreed, the terms of an annuity cannot be changed, leaving millions of investors trying to make ends meet on miserly incomes.
The restrictions will be lifted from April 2016, to give time for the government and industry to consult on how the new system will work.
Osborne wants financial firms to let pensioners spend their retirement nest-egg how they wish by allowing lump sum withdrawals or regular drawdown in the same way the over 55s can access cash locked in their pension funds.
Current laws do not prohibit annuity drawdowns but do penalise pensioners by taxing them at a minimum 55% of the money taken out of the scheme.
Osborne said: “I can see no reason why the millions of pensioners with annuities should not have the same financial freedoms as we have introduced for pension savers.
Annuity drawdown
“These new proposals do not mean annuities are not the right pension investment, but many people who have annuities have expressed the desire to have more control over their money and how to spend it.
“That’s why the law will change, so these people have the option if they wish to take their money out of an annuity they may have bought.”
The new rules will not unravel any existing contract between an annuity provider and an investor, but will allow the investor to allocate the regular payments to a third party in exchange for drawdown rights.
Osborne expects that the change will not create a new market for trading annuities. Instead, he expects institutional investors to offer to take over the annuities.
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