22 January '03 - Re: Transfer of Annuities

In a recent statement that the Inland Revenue's tax rules do not prohibit such a transfer. In answer to a recent Parliamentary Question, Ruth Kelly said that "the tax rules do not prohibit the transfer of liability to pay an annuity to a different provider so long as the terms of the annuity are not altered." It is not clear whether that would meet clients' wishes as many who would like to transfer would like to do so specifically in order to change the terms of the annuity (for example, to turn a with profits annuity into a conventional annuity).

In any event, the Inland Revenue's tax rules are only one element in a large and complex issue.

Pensions are provided under a number of different types of contracts written under different regimes. I think it is fair to say that none of the range of regimes envisaged the transfer of annuities in payment. This creates issues in the legislation, the rules of different pension schemes, and in the conditions written into policies as well as in the Inland Revenue rules.

If a transfer could be achieved from a legal and regulatory perspective it would then be necessary for the Society to determine a value on surrender which would protect the interests of the remaining policyholders. The value of an annuity on surrender would raise issues of assessment of health (and by definition most annuitants are old age pensioners), expenses of the transaction and financial adjustment. Also, as explained in our recent letter to annuitants, with profits annuities have been largely protected from the effect of policy value reductions over recent years. They are around 30% out of line with where they should be and that will be corrected over the next couple of years. Any surrender value calculation would need to allow for that correction immediately.

Our experience with other products is that where surrender is available, most clients have chosen not to surrender. Indeed, earlier this year, following requests from clients, we illustrated terms which might be available to allow changes to the structure within with profits annuities. Members showed very little interest in such changes when examples of possible figures were made available.

The Society has many difficult issues to address and we must prioritise and give most attention to those areas where we anticipate most benefit. Currently, no company that I am aware of allows the transfer of annuities. To pursue such an option we would be treading completely new ground. From the above analysis, we believe that there would be significant risk that after investing a great deal of management effort the terms which might be available (to some annuitants under some conditions) would only be attractive to a handful of the most healthy pensioners.

Instead, we are working on issues which we believe will help to stabilise the fund for the benefits of all members including annuitants.

We will, of course, keep the issue under review and we note that in Ruth Kelly's statement she also noted that "the Government plans to bring forward powers to make it possible to offer people buying annuities more choice and flexibility." This implies that she also recognises that flexibility is not currently fully available and that future developments may simplify the work outlined above.