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Govt scraps secondary annuity market plans

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The government has scrapped plans to create a second hand annuities market.

In a statement this afternoon, the government said that “the consumer protections required could undermine the market’s development.”

The statement reads: “After an extensive programme of engagement with industry, financial regulators and consumer groups, the government has decided not to take forward plans to introduce a secondary annuities market because the consumer protections required could undermine the market’s development.

“Over the past few months, following a wide range of discussions, it has become increasingly clear that creating the conditions to allow a vibrant and competitive market to emerge, with multiple buyers and sellers of annuities, could not be balanced with sufficient consumer protections.”

The statement from the Treasury says it has always been clear that for the majority of people keeping their annuity is the best option.

The Treasury estimated only 5 per cent of people who hold an annuity would take advantage of the reform.

Economic secretary to the Treasury Simon Kirby says: “Allowing consumers to sell on their annuity income was always dependent on balancing the creation of an effective market with making sure consumers are properly protected.”

Kirby adds: “It has become clear that we cannot guarantee consumers will get good value for money in a market that is likely to be small and limited. Pursuing this policy in these circumstances would put consumers at risk – this is something that I am not prepared to do.”

The secondary annuity market was originally due to be introduced this year but, in July 2015, the Government delayed its implementation until 2017 around concerns about the impact that rushing the reforms could have on savers.

In a 2015 Budget document, the Treasury estimated the secondary annuities market would make £535m in its first year, thought to be 2016/17 at the time, and £540m in its second year. After that, the Treasury predicted it would make a loss of £130m and £120m in its third and fourth years respectively.

Last month Hargreaves Lansdown confirmed it would not act as a broker in the secondary annuities market.

Providers were widely pleased with the government’s decision to abandon the market.

Aegon pensions director Steven Cameron says: “All the signs were the secondary annuity market would have been a pension freedom too far. Giving up a guaranteed income for life is a huge decision and not the right one for the vast majority. The risks and complexities for the many far outweighed any possible benefits for the few.”

Head of pensions policy at Fidelity International Richard Parkin says: “While we could understand the thinking behind this, this looked set to be complex with customers struggling to achieve good value and very few people set to see any true benefit.

“We would urge the Government to focus its attentions on ensuring the success of auto-enrolment and creating a coherent system of incentives to save for retirement.”

AJ Bell senior analyst Tom Selby says that the market would have exposed consumers to the risk of scams as well as high charges.

“The plans for a secondary annuity market were always riddled with problems. The market would have been stacked in favour of the buyer and posed unacceptable risks to savers, who could have seen the value of their pot ravaged by charges. Pension scammers would also inevitably have seized on the changes to target annuity holders.  It was difficult to see a long term market where consumers would have got good value.

“It’s interesting to note that by ditching this policy, Philip Hammond has binned one of George Osborne’s key pensions pledges. The industry will now wait with baited breath for further announcements from the Treasury ahead of the Autumn Statement, most notably on the future of pensions tax relief.”

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Given the regulatory requirements of DB and safeguarded benefits and the likelihood it would be small pots being ‘sold’ then one can only think that the cost would have been prohibitive in any case – resulting in poor value for the consumer.

  2. Hoo- ray! A victory for common sense for once. The unanimous view when APFA’s Council discussed it was that the idea was utterly MAD!

  3. in other words another stupid idea from George Osborne.

  4. Christopher Lean 18th October 2016 at 5:24 pm

    LISA next?

  5. The CMC’s will be gutted.

    Now THAT is a pity.

  6. May I also join in, with a hurrah and huzzah !

  7. Now here’s the heartening thing about our profession: I’ve not heard of a single IFA who was in favour of this even though, theoretically, advisers could have made money out of it. That’s one in the eye for those who like to badmouth advisers. I didn’t hear anyone from the regulator speaking out against it however…

  8. My ten pence worth…I never felt that trading annuities in the format being proposed would work, due to the cost and tax considerations amongst many other issues (TEP’s) and their would have been just too many mouths in the trough!

    However, (throwing this out there) why not allow annuity providers to trade/commute a ‘proportion’ of an annuitant’s income (say up to 30% maximum) in return for a taxed lump sum. This avoids middlemen and unnecessary costs and I am sure a fair figure could be arrived at for valuing the lump sum to be commuted.

    e.g. £50,000 annuity paying, say, £2,500 per year. The annuitant commutes (subject to health underwriting of course) 30% of this income in favour of a lump sum. The annuity has been if force for 5 years and the annuitant is aged 70 and in good health; the lump sum may not realistically be £15,000 (30%) but let’s say it was reduced to £12,000 for example (24% of the original annuity purchase price rather than 30% of it, gilt yields notwithstanding).

    This way, the annuitant still keeps an element of their income and has access to ‘some’ of their pension fund which he/she was denied as a result of the new legislation being introduced after they had taken their pension benefits.

    Not perfect but surely a possible and workable solution for those that want it.

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