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IFS: Osborne’s cash for annuities plans face ‘adverse selection’ problem

The Institute for Fiscal Studies has warned the expansion of pension freedoms to existing annuity holders may not be enough to generate a secondary market.

Chancellor George Osborne confirmed a consultation on the plans yesterday as part of the Budget, but the think-tank warns it may prove challenging to generate a marketplace.

IFS director Paul Johnson says: “There is a classic adverse selection problem here. Who is most likely to want to cash in their annuity? Someone who now knows they don’t have long to live.

“How much will they get for their annuity? Not much. What might annuity companies assume about anyone wanting to cash in? That they have reason to believe they won’t live long. How much will they get paid for their annuity? Not much.”

The Chancellor also took the opportunity to reduce lifetime tax-free savings limits for pensions from £1.25m to £1m, echoing a similar proposal from the Labour party.

The IFS says: “While a reduction in the lifetime limit is less problematic than reductions in annual limits and rates of relief (as proposed by Labour) there are better ways to reduce tax relief for pensions in particular by reducing the extraordinarily generous treatment of employer contributions by the NI system.”

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Is there any way we can protect the Life & Pension Intermediaries FSCS Fee block from this this disaster waiting to happen?

    If the government mandate independent advice there’s bound to be few firms that specialize in this before going spectacularly bust and dump the liabilities on the scheme.

    If it does not then the broker firms they expect to go around buying annuities off the elderly are bound to be defined as intermediaries (rather than providers) and we’ll all be paying for when they mess it up.

    Maybe we just have to vote Labour to stop this…

  2. @Tim – I would say they are all muppets, but that’s an insult to muppets :-).

  3. If only Screaming Lord Sutch were still alive to bring some much needed monster raving loony sanity back into politics.

  4. Love this. Having spent ages proving ill health to get a good annuity rate, people now need to prove the opposite to get a good price when they sell it!

  5. They can change the rules to whatever they want but we are the advisers. We advise clients what to do. It is not a case of this is what you can do mr/mrs client you choose, we recommend what they do. It isn’t hard. If you let the client choose what is the point of a client paying for advice. Plus you take on the risk.

  6. I have no intention of getting involved with unravelling annuities. I can’t see who would make a market for these, in the first instance, the annuitant would end up with not very much, ie a small percentage.

    Haven’t we been here before with traded life policies?

    Not for me thank you!

  7. My gut instinct is that this won’t get off the ground. However, I must admit to being confused as to how such a transaction would be treated by the regulator when the process is advised. No product is being purchased. An income stream is being sold. Can anybody provide any insight into this?

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