Pensions - Articles - Royal London offer actuarially fair exchange for guarantee


According to FCA estimates, over half of savers with ‘guaranteed annuity rates’ attached to their pension pots are throwing them away in retirement and are choosing to access their pension funds without taking an annuity.

 In response to this issue, Royal London is to take the next steps in a project designed to help make sure that members do not lose the value of guaranteed annuity rates attached to their pension products in order to access their pension funds. Around 30,000 Royal London customers bought Scottish Life pension products which promised a guaranteed annuity rate at retirement, regardless of market rates. In the past, most policy holders would take advantage of these valuable guarantees by buying an annuity, though around 1 in 5 (typically those with smaller pots) chose simply to take the cash despite repeated warnings that this would result in the valuable guarantee being lost. However, since the introduction of pension freedoms in April 2015 the proportion surrendering their guarantees has risen to 3 in 5as more people take advantage of the increased flexibility surrounding retirement choices.

 In response, Royal London has written to policy holders with guaranteed annuity rates to test the appetite for a process whereby the firm would offer an actuarially fair exchange ( based on the usual pattern of an individual taking a tax free lump sum) in return for surrendering the guarantee. Individuals would be free to opt to retain the guarantee and existing terms if they wished, but would have the option of a cash uplift instead which would give them more options at retirement. The firm will fund free guidance for all those affected and will also heavily subsidise personalised financial advice for those who wish to take it up before making a decision.

 Those expressing a view on the initial mailing have been overwhelmingly positive, with around 5 in 6 wanting the firm to proceed with making individual offers. The next stage is a high court hearing to consider the process, which will now take place on 25th June. The terms of the offer have been overseen by an independent actuary who has to confirm that savers are being offered fair value for their guarantees.

 Commenting, Steve Webb, Director of Policy at Royal London said: ‘Having a guaranteed annuity rate attached to a policy is a very valuable benefit, and that is why we have become increasingly concerned that growing numbers of policy holders are throwing away that guarantee so that they can access their pension pot instead of buying an annuity. We are therefore testing the appetite of policy holders to see if they would like to be given the option of an uplift in the value of their pension pot as an alternative to their guaranteed annuity rate. Those who want to retain their guarantees will, of course, be free to opt to do so. We are already seeing that significant numbers of policy holders are interested in this option. We will continue to work closely with regulators and others throughout this whole process to ensure that members are given a fair deal’.  

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