In a little over a year, more than five million people will be given the option of selling their annuity for a lump sum. Most should simply ignore this extension of the Government’s freedom and choice agenda and carry on enjoying the peace of mind that comes from a guaranteed stream of income for life.
Most but not all. Indeed, there are some scenarios where trading in an annuity might deliver more value. A good illustration of why we should support the secondary annuity market was contained in the FCA’s latest quarterly update on how those aged over 55 are accessing their pensions.
It revealed between July and September last year, more than two-thirds of customers whose policies include guaranteed annuity rates did not take them up.
Given GARs may return double the prevailing open market rate, they are a valuable benefit. But they are offered on a “use it or lose it” basis and people are put off by restrictions on when they can be taken and what options can be included.
Clearly, thousands are missing out on extra income, probably to the relief of the GAR provider, which would otherwise have to stand by its expensive promises. The FCA’s figures show more than six in 10 of those with pensions of more than £30,000 were not exercising their right to the higher rate, with the figure rising to nearly eight in 10 for those with funds of £10,000 to £30,000, and nine in 10 of those with funds of less than £10,000.
A secondary annuity market could give pension savers with GARs a way to monetise the extra value by accepting the GAR but then trading the income to the highest bidder. While the seller would have to allow the buyer some profit, they may get more than otherwise would be available, with the option of using the sale receipts to buy a more suitable solution. This is just one illustration of the kind of pockets of value being able to sell an annuity could deliver.
Some clients may value a cash lump sum more than an income stream. An example might be if they can comfortably live off other sources of income, making the guaranteed income surplus to requirements.
A client may have received an inheritance or may have bought the guaranteed income solution only to satisfy the now defunct requirement of having £20,000 a year secure income to enter flexible drawdown. Either way, being able to switch from income to a lump sum could be helpful, whether there is a short-term need for money or longer-term thinking around income in later life or inheritance tax planning.
Meanwhile, where personal circumstances change, people may want to reconfigure their guaranteed income plan and intend to keep the money invested within the pension environment.
We know in the past that many retirees bought single-life products despite being married and even those who were single at the time may later find a partner and want to add a joint-life benefit.
Creating a second hand annuity market will not be easy. However, it seems to be a policy the Government is increasingly determined to push through.
It believes people should be trusted and it does not want to deny the retirees of yesteryear the same freedoms it has bestowed on today’s retirees. The Government’s response to the consultation document, published just before Christmas, reveals the progress that has been made towards creating a market place that works for both buyers and sellers by April 2017.
Central to that challenge is providing sellers access to a competitive open market to ensure they receive fair value.
A package of protection measures should also be introduced through effective conduct regulation and it is vital sellers are well informed by gaining access to regulated advice and services such as Pension Wise.
This next year is going to throw up more difficult questions as the details are hammered out. For advisers, it will be worthwhile contributing to that debate.
Stephen Lowe is group communications director at Just Retirement