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Breaking point: Adviser liability fears on course to hold back secondary annuity market


Liability fears could derail the Government’s plans to let five million pensioners cash in their annuities from next April.

Advisers could find themselves faced with a rerun of the rollout of the pensions freedoms as customers are confronted with the advice requirement but face a dearth of firms willing to participate.

Last week the FCA set out how the secondary annuity market will operate, with head of pension policy Maggie Craig telling Money Marketing the regulator’s measures were designed to combat the “significant risks” facing consumers.

However, key details remain unclear – including where the advice threshold will be set – leaving potential customers, advisers, brokers and annuity providers waiting.

History repeats itself

Despite the problems encountered with the pension freedoms – where customers complained the advice requirement was blocking access to the reforms – the issue remains unsolved.

Now it threatens to stifle the secondary annuity market.

Four separate consultations were published last week, by the FCA, the Treasury, HM Revenue & Customs and the Prudential Regulation Authority, predicting that about 300,000 people – out of five million – would make use of the reforms.

The precise level of the advice threshold is yet to be set, with the FCA waiting on the Treasury. The Government has indicated, as is the case with the freedoms, that customers are free to act even against the recommendation of an adviser.

Yet most advisers appear reluctant to commit to the market.

“This is a really good example, like the pension freedoms, where the Government is saying ‘wouldn’t it be great if we did this?’ and not asking anybody before they do it”

Libertatem director general Garry Heath says: “This is a really good example, like the pension freedoms, where the Government is saying ‘wouldn’t it be great if we did this?’ and not asking anybody before they do it.

“And then they blame us because we can’t do something that was very expensive to do in the first place. The average Joe will not be in a position to pay the cost.”

But Craig is confident advisers will be willing to work in the fledgling market.

She says: “We have to wait and see. There will be advisers who get into this space. We’ve taken soundings from advisers and some will, and that’s entirely up to them, as it is with any part of their business.”

In 2015 the regulator published a factsheet on dealing with insistent clients but Craig hints there will be no further action in this area.

She adds: “We recognise there will be occasions when a client wants to take a different course of action to that recommended by the adviser and we’ve reminded advisers of the steps they should take when advising an insistent client.

“A client does have the freedom to not follow the adviser’s recommendation and so there is a limit to how much further we can take that.”



There are also concerns over how strong competition will be among annuity buyers. FCA rules mean providers will have to show their quotes alongside how much it would cost to purchase the same income stream at today’s annuity rates.

Just Retirement, Partnership and Retirement Advantage have pledged their involvement in both the buyback and secondary market, but others have been less gung-ho.

Craig says the regulator has identified 10 to 12 firms likely to be involved in one or both areas.

Aviva head of financial research John Lawson says the firm is likely to buy back but is less sure about buying other insurers’ annuities.

He says: “Given where we are, we’ve got 11 months to make this a reality and that’s quite a challenge.

“You have to take a proposal to the PRA about how you are going to use those assets and how you’ve taken into account the various risks that might arise and how you’ve mitigated them.

“When you take a proposal to the PRA it usually takes a long time to agree that, maybe six months, so unless you have a proposal by September it’s unlikely you will be in a position to say how you are going to use those assets from April next year.”

Government figures show it expects to bank £960m in the first two years after the launch of the market before seeing £295m leave its coffers in 2019/20 and 2020/21. The projection suggests an early gold-rush before demand quickly trails off, meaning providers have to be ready for launch or risk missing out entirely.


Final salary boost

HMRC’s consultation reveals how members of defined benefit schemes will be able to cash in.

Members of schemes where pensions are paid by bulk annuities purchased by trustees will also have access to the market. However, it will be left to trustees’ discretion to assign the annuity to individuals.

Just Retirement group communications director Stephen Lowe says opening up the reforms to  defined benefit schemes boosts the lifespan of the market.

He says: “When freedom and choice launched, everyone’s predictions on withdrawals were wrong. This is not a static market because every year there is £15bn of bulk annuity transactions. That creates a whole new stream of people who will be eligible when it moves to buyout.

“The more bulk annuities you do, the more you fuel the market’s potential. So it’s not like it will end after three years, there will be at least 10 years of it.”

But Lawson sees the Government’s decision as “bizarre”.

He says: “It’s highly unlikely members will know if their pension is insured or not. It will come out in the media that some DB members can sell their annuity, and some can’t. It’s going to be an unholy mess.”



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. I do not see any value to consumers for advisers getting involved. This appears to be a populist move by George Osborne based on the tenuous principle that Pension Freedoms should be available to all in all areas of pension provision. How will this impact the pricing and cross-subsidy levels from which annuitants can potentially benefit if this market takes off? This kind of stuff is nothing to do with advisers adding value. If people really must sell their own income stream then set up an online auction house with a centralised underwriting form, do it as an automated market place and ensure that before the annuity is sold all the necessary paperwork and warnings are issued by the purchaser, and then ensure that a phone call is taped to ensure that the seller has been made fully aware of the likely loss in value they will suffer if they live the expected life span or beyond. This is not something that should be easy to sell, sellers should be made to face the likely loss of real value rather than just be able to do it to meet libertarian freedom of choice expectations.

  2. The list of completely unconsidered obstacles to this idea working is so long that it’s almost laughable. I certainly won’t be getting involved, not least because, in the vast majority of cases, my advice is likely to be not to do it and the client will then start grizzling about having been charged a large (in his eyes) fee only to be told he shouldn’t do what he’d already made up his mind he was going to.

    I won’t facilitate it on an EO or IC basis either ~ how can you when the FOS commonly declares EO to have been invalid and disregards signed disclaimers?

    For advisers getting involved in this market, it’ll be like jumping into a pit full of poisonous snakes. And anyway, are people wanting to sell an existing annuity likely to be the sort of clients you want anyway? If they really don’t need the income, why did they buy an annuity in the first place?

  3. As always the FCA can say what it wants about insistent clients, they do not have the final say about a complaint, that is the job of the FOS.So until the FOS fully explains its requirements it is very unlikely any adviser will sign off the business. This is very simple, after 25 years of being blamed for every problem, missed sold product, in retrospect, we have become wise to the process. If we had a list of requirements, regulatory statements to cover off with a client, we may then be able to help.

    What we now require are clear requirements from the FOS of what needs to be documented and how. So we cannot be judged in retrospect or hounded by claims companies because we have not included a point deemed important some years down the line. Maybe then advisers will be more willing to sign off business for the stupid to blow their funds, live in poverty and regret.

    As I have stated before adviser have been forced in to policing these new pension freedoms, only to be told by the consumer, the Government they do not like our rulings. If you were to remove the speed limits in the UK there would be many more fatalities!just so a handful of idiots could drive like nutters. I wonder would consumers groups push for this?

  4. agree with all of the above and still don’t think that this market will go anywhere once people realise what the might get back from their annuities.

    Especially those with a small annuity (and I think the average in the country is about £25K). On the face of it, if you brought a standard annuity at age 60 for 25K, you might have got an annuity rate of say £1,050 (4.42% ish), if you were 65 when you sold the annuity, then with annuity rates for the same type of annuity being around 4.95%, you might assume that you’d get £1,020 / 4.95% = £21,212. That would seem to be a good way to value your annuity.

    But then you have to take off the margin that the annuity provider is going to take, the risk premium that they will take, the cost of advice, the cost of underwriting, if your health has worsened (especially if your original annuity wasn’t underwritten to reflect your health), the one off tax charge (presumably at your marginal rate), plus I’m sure many others that I can’t think of and if you got back more than £8-10K I’d be incredibly surprised.

  5. Has “Traded Life Settlements” written in ghostly ink all over. One has to admire the bravery of an adviser who decides to get involved…….

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