The Second Hand Annuity Market – A Recipe for Disaster?15 December 2015
The Second Hand Annuity Market – A Recipe for Disaster?
In response to the recent consultation on how a secondary annuity market would work, the government confirmed this morning, 15 December, that tax restrictions for people looking to sell their annuity will be removed in 2017, opening the floodgates for millions to sell their annuities. This will certainly be an attractive prospect for all those who had rued their ‘choice’ of taking a fixed income at retirement, but as David Smith, Director, Financial Planning at Tilney Bestinvest discusses.
Will it actually work? And more importantly, how will it affect the consumer?
“With effect from 2017 consumers who had previously used their pension funds to purchase an income for life through an annuity will be afforded the opportunity to sell their income – through a broker, or intermediary – for a lump sum. The annuity will continue to be paid to the third party in line with the longevity of the original annuitant. There is no doubt that for those who are presently locked into small annuities or those who favour lump sum death benefits over a taxable income, this will be a welcomed reform.
“There is however, much that needs to be overcome in terms of practicalities which will ultimately determine whether this truly is a worthwhile initiative.
A Buyer’s Market - Who will actually buy the Annuities?
“Owing to fears of consumers not shopping around, it seems the Government have opted against the more straightforward route of the annuity provider buying out the annuity and have instead proposed that all interested parties – including the original provider – can bid for the income payments through an intermediary or broker, such as a financial adviser. However, it is likely that such ‘interested parties’ will need to be FCA registered, restricting the size of the market and in turn, the potential competition between buyers.
“Furthermore, it is highly unlikely that a single annuity will ever be bought in isolation; surely such institutions would only be interested in buying in bulk, mitigating the risks associated with adjudging an individual’s health status and a single annuity’s value for money. But who will create these packaged products? Whoever it may be, they’ll certainly want their slice of the pie, reducing the potential offers to the consumer.
Knowledge is key
“Much emphasis is being placed on increasing consumer knowledge and awareness, but how is the consumer expected to know what is a good deal for their annuity? Many such products are not simply an income for life for an individual; they may contain added features such as spousal benefits or guarantee periods that are not so easily quantifiable. Talks of ‘benchmark annuity values’ have apparently hit brick walls, principally due to providers’ fears of falling short.
“Since Pension Freedoms were introduced, the Government have put significant emphasis on obtaining financial advice when giving up a defined benefit pension for a lump sum and indeed the second hand annuity market will and quite rightly, should, be no different. There will therefore be a requirement for consumers with annuities over a certain value to obtain financial advice before being able to sell. The exact threshold is to be determined next year, but will there be financial adviser appetite for such a market? Will advisers want to take on such a liability taking into account the lack of protection surrounding Defined Benefit transfers? At the very least, advisers have to be paid for their services, which will result in another layer of cost to the consumer. Pension Wise, the Government guidance service has been deemed to be sufficient for those below the threshold, but is this enough? Who is to say that a smaller annuity for one person has less overall value to them than a larger annuity does for another?
“Then there is the tax aspect; bulking together a number of taxable income payments and receiving them all in a single tax year, could result in a significantly higher tax bill than was envisaged. Is this again a bona fide reform to pass freedom back to the consumer or is it another legislative Trojan horse created to boost the short term tax-take for the Exchequer?
Anything left for the consumer?
“Taking into account the applications, medical underwriting, financial planning / cash flow advice, consumer protection and not to forget the buyer’s margin, the costs associated with selling an annuity on the second hand market may end up quite prohibitive.
“Furthermore, it’s all but guaranteed that the reform will be an ‘all or nothing’ scenario, with part redemptions being classed as unauthorised. For those only requiring a small lump sum, will they be forced to sell their entire annuity – at a cost – take their lump sum then use part of the proceeds to purchase another annuity at another cost?
“Ultimately, the price a consumer receives for their annuity may come as a shock. Bearing in mind the potential tax charges if taken as a lump sum, the final offer for their annuity could make the consumer’s arduous journey up to this point completely worthless. All in all, the prospect of being able to swap an unwanted annuity for a lump sum is an attractive one, but taking into account the mechanics of doing so, will it be in the best interests of the buyer, the adviser and most importantly, the consumer? As they say, the proof will be in the pudding.”
David Smith is available for further comment on 0191 269 9971 or firstname.lastname@example.org
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0203 818 6846 / 07989 650 604
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Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.