Osborne unveils secondary annuities overhaul


The Government has unveiled details of a new secondary annuities market to be introduced in April 2017, including a U-turn on plans to block providers from buying back guaranteed income streams from existing customers.

Policymakers had originally planned not to allow providers to buy back annuities, citing the risk of insurers exploiting a “captive market” and the potential impact on insurers’ solvency.

However, providers warned this would mean customers would be likely to get a worse deal.

And in June Money Marketing revealed the Treasury had backtracked and planned to allow providers to buy back annuities from existing customers.

Money Marketing subsequently revealed this would be facilitated by private sector third-parties such as annuity bureaux.

People wanting to sell annuities above a certain value will be required to take advice, although this threshold has not been set.

In a call for evidence published this morning, the Treasury says: “While the Government recognises the benefits both to annuity holders and the industry of permitting this ‘indirect buy back’ through brokers, financial advisers or other intermediaries, it acknowledges that an extra layer of cost would be imposed in comparison to direct buy back. In addition, buy back would only be possible if platforms or brokers enter the market.

“Overall, considering the benefits and risks associated with allowing buy back, the Government agrees that it should be allowed indirectly.

“The Government plans to legislate to create a further regulated activity for buying back an annuity. Annuity providers will need to hold this permission in order to buy back their annuities through a regulated intermediary.

“The Government expects that the FCA will consult on its approach to authorising firms for this permission, together with any related FCA rule changes.”

The Government will also allow annuity providers to buy back low value annuities directly, although it has yet to determine the threshold at which this will be allowed or how this will be measured.

In addition, the Treasury says it does not consider second-hand annuities suitable for retail investors “given the complex pricing and liquidity features of the products”.

“Therefore, the Government intends to remove this ability through secondary legislation and will ask the FCA to consider what further steps are necessary to protect UK retail investors, for example with regards to onward sale in the “tertiary” market,” it says.

Policymakers will, however, allow second-hand annuities to be packaged up and sold on after they have been surrendered.

The Treasury says: “Some potential investors have indicated that they might seek to securitise annuities or place them in funds in order to make them available to other investors. However, the ability to reassign the annuity income directly will provide greater confidence in purchasing. The Government’s view is that in order to promote liquidity in the secondary market, it should not place restrictions on buyers’ ability to reassign annuities once purchased.

“In conjunction with the proposed regulation of the secondary market, this onward sale of annuities poses fewer consumer protection and tax avoidance risks. The Government does not propose to restrict any entities from purchasing on the tertiary market, but will be considering with the FCA whether to prevent UK retail investors from purchasing rights under annuities that are re-assigned on the “tertiary” market, in order to protect them from a complex financial product.

“The Government will consider whether any further secondary legislation is required in order to allow the ‘tertiary’ market to function.”

While savers will be able to cash in their entire annuity under the proposals, they will not be allowed to assign chunks of their guaranteed retirement income. The Treasury says this would have been “highly complex and create additional costs”.

In addition, the Government intends to work with the FCA to create an online tool which will allow annuity holders to enter their details and receive an estimated range of the price they would get if they sold their annuity on the secondary market.

Following the March 2015 Budget Money Marketing revealed Government plans to exclude 650,000 people on means-tested benefits from the reforms.

The consultation response published confirms the Treasury has u-turned and people in receipt of means-tested benefits or in social care will also be allowed to sell on their annuities.