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?

Tax

“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 david.smith@tilneybestinvest.co.uk

- ENDS –

Press contacts:

Gillian Kyle
0203 818 6846 / 07989 650 604
gillian.kyle@tilneybestinvest.co.uk

Matthew Gray
0207 189 2492
matthew.gray@tilneybestinvest.co.uk

Important information

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Current or past yield figures provided should not be considered a reliable indicator of future performance.

This article is not advice to invest or to use our services.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

Please note we do not provide tax advice.

If you are unsure of your relevant options you should seek professional financial advice or visit Pensionwise.gov.uk

About Tilney Bestinvest

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.

The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.

For further information, please visit: www.tilneybestinvest.co.uk

About Tilney

Tilney is a leading investment and financial planning firm that builds on a heritage of more than 150 years. The Tilney Group operates under the Tilney brand for Investment Management and Financial Planning and Bestinvest for execution-only investing. We look after more than £22 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including Best Fund Platform and Best SIPP Provider at the 2017 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. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Group employs over 1,000 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.