View more on these topics

Andrew Tully: Avoiding secondary annuity regrets

Andrew Tully White background 700

In less than a year’s time, people will have the ability to trade in their annuity for a lump sum. However, there remains much uncertainty and, with no less than four consultations currently running, it is unlikely the final details will emerge before the autumn. This gives scant time to build the infrastructure and little definite information that can be given to customers now.

It seems clear many providers will allow their existing annuitants to trade in their income should  they wish to do so. Doing otherwise puts them in the firing line for blocking customer freedom.

However, it is less clear how many buyers will participate in the market, and the fewer buyers there are the higher the risk people will get poor value.

Buyers will need significant capital reserves and a willingness to take on this kind of monetary  risk. They will also require knowledge of longevity and the impact of health and lifestyle on it. This starts to feel like a relatively small list.

One of the obvious potential buyers is annuity providers using the second-hand market to back their annuity book in the same way as they invest in corporate bonds, equity release and commercial property.

While it has not given a definitive view, the Prudential Regulation Authority’s initial indication is that these assets will not qualify for the matching adjustment under the new Solvency II regime.

In other words, if providers wish to use secondary annuity assets to back some of their annuity book, the capital requirements will be higher. Unless providers can agree some restructuring with the PRA, it will make buying second-hand annuities less attractive than other asset types.

There is also a considerable “moral hazard” for buyers. If a seller omits details about their health and dies shortly afterwards, the buyer will either have to accept the loss or try to recover some funds from the deceased’s family. Neither feels particularly palatable.

As giving up a guaranteed income stream is a risky and complex decision, people with annuities over a certain level will need to take advice before they can proceed. Despite the four open consultations, we currently have no suggestion what this threshold will be, and whether it will be a capital value or income level that will trigger the advice requirement.

There is likely to be a market for advisers willing to give advice in this area, although many may not want to get involved.

That said, current or previous customers that have annuities may come to you as the first port  of call, so you need to have a position on whether you can help these people or where you direct them to.

It is clear why some people may want to trade their annuity. For many, a lump sum in their hand to use as they choose is of greater value than an ongoing income stream they do not really value.

This means there is a real risk many with lower-value annuities may sleepwalk into a poor-value offer, which they could regrettaking in future years.

 Andrew Tully is pensions technical director at Retirement Advantage


FCA interior logo 620x430

FCA leaves secondary annuity questions unanswered 

Plans for the second-hand annuity market unveiled today lack crucial details just a year before the reforms are due to launch. The FCA and the Treasury both published documents outlining how they expect a second-hand annuity market to function from April 2017. However, questions over the advice requirement, how providers will keep track of customer deaths […]

FCA logo new 3 620x430

FCA to ban commission for secondary annuity market

The FCA says brokers working in the secondary annuity market will not be allowed to charge commission. In a consultation setting out rules to govern the secondary annuity market, published today, the FCA says people selling on their annuities will be required to take “appropriate advice” above a threshold. However the regulator has not defined […]

Is this the endgame for the current mergers & acquisitions boom?

Last year, worldwide mergers and acquisitions (M&A) rose to an unprecedented $4.7tn, according to Thomson Reuters, a 41 per cent increase over 2014. Anthony Forcione, senior equity analyst at Loomis Sayles, an affiliate of Natixis Global Asset Management, looks at what’s been driving this particular wave of mergers. Click here to view full article: Loomis-Sayles


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm