The UK’s High Court has approved insurance company Royal London’s plan to allow customers with guaranteed annuity rates to convert their guarantees into a boost to the value of their pension.
Royal London said the plan was aimed at resolving the issue of policyholders who “throw away valuable guaranteed annuity rates.”
The firm said that since pension freedoms were introduced in 2015, there has been a large uptick in the number of customers deciding to take their pension savings in cash rather than buying an annuity at what it deems a “generous guaranteed rate.” Royal London estimated that approximately 60% of policyholders with these guarantees are surrendering them because they prefer to withdraw their capital rather than buy an annuity.
“The High Court’s decision is a welcome step forward in the process of looking after our former Scottish Life customers who hold these guaranteed annuity Rate products,” Steve Webb, director of policy at Royal London, said in a release. “With the uplift that we are offering, customers will be able to retain the value of the guarantees attached to their policies whilst also enjoying the flexibility of pension freedoms. And those customers who want to keep their guaranteed annuity rate option will be free to do so.”
In order to “protect these customers,” Royal London said it is giving them the option of exchanging the guaranteed annuity rates attached to these policies with a “substantial cash uplift.” Although the amount of the uplift will depend on the terms of the individual policy, and when it was taken out, they are expected to be in the range 40% to 80%.
Royal London also appointed an independent actuary to oversee the calculations and an initial round of contacts with affected policyholders to gauge interest in the process. The firm said that nearly 80% of policyholders affected who responded to the initial mailing said they wanted the company to proceed with the offer. It will now send letters to 30,000 customers giving them the option to make the exchange, and letting them know the amount by which their pension fund could be increased.
Policyholders who do not choose to keep their guaranteed annuity rate will have the opportunity to vote on these proposals before a final court hearing in November to sign off on the process.