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Proof insurers can give back annuity cash (if they want!): Phoenix Life scheme could be copied by other firms

Today, Money Mail reveals how insurers can give savers back the cash they invested in annuities.

More than five million pensioners are currently blocked from cashing in their pots because they were sold lifetime contracts.

Last week, we disclosed that major insurers, including Prudential, Scottish Widows and Legal & General, were investigating ways to let pensioners exchange their small monthly annuity incomes for one-off cash lump sums.

However, their bosses warned it would be difficult to unpick these lifetime deals — and some even ruled it out.

Annuities grief: More than five million pensioners are currently blocked from cashing in their pots because they were sold lifetime contracts

Yet proof exists that it is possible — because one insurer has already paid out to large numbers of customers.

As part of Money Mail’s Unlock Our Annuities campaign, we have obtained the details behind a scheme run in 2013 by Phoenix Life to let several thousand customers cash in tiny annuities.

It is the first time the story behind the scheme has been told — and, crucially, it provides a blueprint that Phoenix says all insurers could copy.

To pay out, Phoenix used the government’s so-called small pots rules, written in 2012, to allow savers to cash in two pension pots worth up to £2,000 each. These rules still exist and, today, let you cash in up to three pots, worth up to £10,000 each.

The giant insurer wrote to 7,000 customers, asking if they would like a lump sum instead of their monthly incomes.

They have switched allegiance after the Treasury axed plans to let people turn their paltry monthly pension incomes into a lump sum.

Money Mail reader Lionel Kaye described it as a ‘terrible U-turn without any consultation with voters’.

Steve Vince wrote: ‘I was expecting to be able to pay off my mortgage. Now, it looks like I will have to keep working for another five years. The Conservatives have lost my vote.’

Graham Newman echoed this, adding: ‘My wife and I decided not to vote Tory because of their U-turn on annuities.’

Letters detailed how much savers would get and stressed the offer was optional.

Recipients had all bought annuities with less than £2,000 and some were receiving as little as a few hundred pounds a month.

Phoenix realised that, to some, a lump sum would be more useful for things such as paying debts and home repairs. Customers were given six weeks to decide and 65 per cent asked to cash in.

The payouts were subject to income tax like other earnings.

Phoenix explained to customers that they were giving up guaranteed lifetime incomes, which, even if small, might be important for covering bills.

The offer was made to people aged between 60 and 85.

This age limit was set over concerns that very elderly people might be less able to make an informed choice about a big financial decision.

Other insurers could adopt this approach to allay executives’ concerns.

To work out the amount to hand back, Phoenix calculated how much the company had set aside on its balance sheet to pay a customer an income for the rest of their life.

This was done using average life expectancies. Phoenix did not take into account individual circumstances and health because the annuities it was paying out were standard contracts, not enhanced deals tailored to the customer.

Some insurance bosses have claimed they would have to conduct health checks on customers to work out payouts — but Phoenix says this is not necessary.

The majority of pensioners had standard annuities before pension freedoms were introduced in 2015, so most firms could use the same methods as Phoenix to calculate fair payouts, says the company.

Phoenix included the cost of administration and set a final figure for each customer, factoring in their age and how long they had been taking an annuity income.

Scheme: Phoenix used the government’s so-called small pots rules, written in 2012, to allow savers to cash in two pension pots worth up to £2,000 each

Crucially, the annuity pay-out scheme helped reduce Phoenix’s costs — not increase them. This should encourage the chief executives of insurance firms, some of whom have complained that paying annuities would be too expensive.

Phoenix says it was able to save money because it no longer had to administer as many small monthly payouts.

Danny Dowd, head of retirement propositions at Phoenix, says: ‘The big driver behind the offer was that this could benefit our customers, giving them more options in retirement.

‘We saved a small amount of money, but that wasn’t the main motivation.

‘The numbers speak for themselves in terms of how much customers appreciated the offer. We made it clear that it was optional, and more than six in ten still took the deal.

‘It was a positive thing to do and was well received by our customers.’

Phoenix is considering repeating its scheme. ‘We are still thinking about whether we could do this again, but we don’t want customers to cash in annuities that are offering them good value in retirement,’ adds Mr Dowd.

It took Phoenix three months to devise the plan in 2013, and Mr Dowd says pension rules are now more complicated.

One wrinkle is that customers are now allowed to cash in £10,000 by law if their company allows it, up from £2,000.

With more money involved, ‘more consumer protections’ need to be put in place, says Mr Dowd.

These could include more prominent warnings spelling out that savers could face tax bills, lose state benefits and valuable income streams a spouse may have inherited.

Mr Dowd says: ‘I believe other insurers may be able to do something like we did, but they will need to protect their customers’ interests.’