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Govt told there would be enough demand before scrapping second-hand annuities

Westiminster houses of parliamentFigures from across the pensions industry convinced the government there would be sufficient demand for second-hand annuities before ministers scrapped the proposals, Money Marketing has learned.

Internal analysis from the Treasury obtained under the Freedom of Information Act – the full results of which will be published in this week’s print edition of the magazine – sheds light on how the government was preparing to go ahead with plans to introduce a secondary market for annuities based on a perceived demand from the industry.

The analysis shows that while the impact of the reforms on annuity providers would have depended on how many chose to allow their customers to sell their annuities, the government expected that most would choose to do so.

The document reads: “For the last year, the government has been engaging with a wide range of firms including annuity providers, potential intermediaries and potential investors. Potential investors include life insurance companies, pension schemes and investment fund managers, all of whom have expressed an interest in purchasing annuities, giving the government confidence that there will be demand for annuities in a secondary market.”

On the demand side, the government also identified two groups would have a “pure economic interest” in a lump sum, rather than the lifetime income stream: those in debt and those seeking to invest.

In September 2016, however, just one month before the plans were officially scrapped, Hargreaves Lansdown announced it would not operate a broking service for secondary annuities.

The analyis shows that the government had also lined up a number of options for when customers would be forced to take advice or guidance on selling their annuities.

For its analysis, the government said it was assuming that it would have followed the FCA’s approach and placed the burden on annuity providers to make sure that customers had received guidance or advice where necessary.

However, it appears it later considered that these would still not act as adequate safeguards for annuitants, dropping the plans to create the secondary market since “the consumer protections required could undermine the market’s development.”

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  1. Five scenarios spring to (my) mind in which surrendering an existing annuity in payment could be advantageous to a policyholder.

    1. Where his life expectancy is severely curtailed, there’s little if any guaranteed payment period remaining and no widow’s pension,

    2. where the surrender value, even allowing for the tax hit, could clear or significantly reduce burdensome debt/s,

    3. where the policyholder’s health and the surrender value of his existing annuity are, together, such that an enhanced/underwritten annuity better than the one being given up can be obtained in the open market (assuming that a transfer from one annuity provider to another would invoke no tax charge) or

    4. where the policyholder has realised that (because he chose not to take advice) he bought the wrong annuity, e.g. one with no guaranteed payment period and/or no widow’s pension, and the right one can be obtained without a significant reduction to the amount payable right now.

    5. where the client’s secure income from other sources and/or an unexpected influx of capital are such that he really doesn’t need what may be just a small annuity.

    Other than in at least one of those five scenarios, I think it highly unlikely that any IFA (in his right mind) would be prepared to take on a client wanting to surrender an existing annuity for a tax assessable lump sum, just because he doesn’t like annuities and wants to spend the surrender value on a new kitchen/car/home extension/round-the-world cruise. Or perhaps he wants to transfer the surrender value into an Income DD arrangement, with all the work that that would involve to evidence suitability.

    And you’d have to charge for the work involved because options 1, 2 and 5 afford no scope for a PFAC or, having done all the groundwork, the surrender value may be insufficient to render options 3 or 4 viable.

    Plus, of course, you’d be crazy even to consider facilitating any of these five options on an EO or IC basis.

    Back in the 90’s we were approached by a few clients wanting to sell their existing endowment policies. After quite a lot of work and on the figures alone, not a single one was viable. Today, you’d have to undertake a full suitability assessment, for which you’d need to charge a fee. The whole proposition of being able to surrender or sell an existing annuity is so fraught with obstacles that it’s hard to see how anyone can have thought it could ever be viable.

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