The second hand annuity market – To sell or not to sell?27 April 2016
The second hand annuity market – To sell or not to sell?
It is now less than 12-months until the much heralded second hand annuity market – “SHAM” - will be launched, as the Chancellor seeks to complete his pension freedoms agenda. With such a short period to implementation, the Financial Conduct Authority (FCA) has finally produced their consultation paper on this area which has not provided the clarity that many annuity holders were hoping for. Furthermore, having reviewed the information provided within the FCA document, Gary Smith, Associate Director of Financial Planning, Tilney Bestinvest questions whether this market will actually offer any ‘real’ value to those seeking to sell their annuities. Smith looks at some of the finer details announced in the consultation document and the likely impacts that these could have on the second hand annuity market:
What options will the seller have?
“The FCA has proposed two methods that an annuitant can follow in attempting to sell their annuity incomes; the first being to sell their future annuity income to a third party; and the second to sell the income back to the annuity provider. However what has become apparent is that the success of these markets, in generating value for sellers, will depend upon attracting large numbers of buyers to the market place. The fewer the buyers the less competitive the market place will be and sellers could end up being offered derisory amounts for their annuity income as, after all, what is the attraction to an investor or annuity provider in investing in this market?
“The FCA has also suggested that advice will be required if the value of the annuity income to be sold is above a certain level. No indication is given to the level of income that will trigger the requirement for advice. Indeed, this creates more questions than answers. For example will the limit be cumulative or per individual? You could have a scenario where a husband and wife seek to sell their income and one is faced with having to seek advice and the other does not.
“The FCA has been clear that commission payments for advice will not be permitted from the second hand annuity market and that all advice fees will have to be paid for by the seller. This could make seeking advice prohibitive to many. Furthermore, any offer made to the seller will be net of the buyers’ costs, which are likely to include the cost of medical underwriting, which are typically £125 per report. In addition to these fees, the seller also needs to consider that the lump sum they receive will be subject to an income tax charge.
“To try and illustrate the value of an offer made to the seller, the buyer will be required to provide an indication of the replacement cost of the annuity income if it were being bought on the open market. Whilst I welcome this proposal, I would also argue that the clear comparison of the value of their annuity income and the lump sum that they have been offered is likely to lead many to questions as to whether selling their income is actually worthwhile.
Not the panacea many were hoping for
“Ultimately, whilst the Chancellor set out with good intentions I do not believe that the second hand annuity market is going to be the panacea that many ‘locked into annuities’ were hoping for. The likely lack of buyers in the market, the requirement for buyers’ and advice fees to be incurred and, the fact that any lump sum offered will be subject to income tax, will make the attractiveness of selling their income too unpalatable for many. Indeed, I would question the FCA estimate that over 300,000 annuitants will seek to take advantage of this market as, once we start to see the value of initial offers I suspect that many will be put off and prefer to retain their annuity incomes.”
To discuss this or any other financial planning topic please contact Gary Smith on 0191 269 9971 / firstname.lastname@example.org
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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. This press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.
Before accessing your pension it is important to consider all of your options therefore you should seek professional financial advice or visit Pensionwise.gov.uk.
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