Individuals’ inability to determine whether selling their annuity is value for money is a “serious issue” that could undermine the Government’s plans to develop a second-hand annuity market, the Institute for Fiscal Studies says.
In an observation note published today, the IFS says the Chancellor’s announcement that around five million people will be able to sell their annuities is a “natural next step” but warns the market could fail to develop because of “adverse selection” principles.
Savers also need to have access to “good quality financial advice and guidance” to help them swap an income stream for a lump sum, the note adds.
The IFS says the difference in information held by purchasers and sellers of annuities means a market “might be limited or even difficult to establish at all”.
It says purchasers’ lack of detailed information on sellers’ lifestyle, health problems and family history may mean the prices they are willing to offer will be far lower than individuals expect.
The note says: ”Evidence suggests that at least a significant minority of annuity holders – in particular, older annuity holders – may struggle with the complex decisions required in valuing their annuity compared to an alternative lump sum.
“This suggests that, at the very least, individuals will need to have access to good quality financial advice and guidance in order to navigate this new market – if, indeed, such a market does spring into existence.”