Creating a secondary market to allow people to sell on their annuities is a vote grabbing initiative fraught with risks, warn pension experts.
Over the weekend the Treasury confirmed it will be publishing a consultation this Wednesday on reforms that would allow people to be paid a lump sum in exchange for the stream of income provided by an annuity contract from April 2016. The Treasury also wants to allow people to swap their annuity for a more flexible drawdown product.
While many commentators support of the idea in principle, they warn there is a high risk to individuals in assessing the merits of a sale.
Just Retirement director Steve Lowe backs the plan as a “logical extension of the freedom and choice agenda” but Barnett Waddingham senior consultant Malcolm McLean says the move is an example of “political expediency” ahead of the May general election.
He adds: “Early indications are there is every possibility of serious consumer detriment for which adequate guidance and protection arrangements need to be in place if this is to be avoided or at least minimised.
“There is also the question of how much extra cost there will be on the public purse arising from the change. It is far from clear at the moment whether those people who trade in their existing annuities for a cash settlement will be allowed to fall back on means-tested benefits, notably pension credit, later on.”
MGM Advantage pensions technical director Andrew Tully says he “has sympathy” with people receiving very low levels of annuity income but warns the market could be a “minefield”.
He says: “This idea is full of pitfalls and is a potential minefield. There are significant risks and two wrongs won’t make a right. Being sold a poor value annuity and then being offered a poor value cash lump sum, which is taxable, will not address the issue of an inappropriate original sale.”
Partnership chief executive Steve Groves says his firm would potentially be interested in buying other insurers’ annuities and “would love to see a crowd funding solution developed” in addition to expected demands from institutional investors.
The consultation will also consider extending the scope of new guidance service Pension Wise to help people weigh up the issues around selling their annuity.
The Pensions Advisory Service is delivering telephone support for Pension Wise.
TPAS chief executive Michelle Cracknell says there is a role for guidance but adds a mandated advice step could be introduced to “follow similar lines” to new rules for transfers out of defined benefit schemes. People with pots worth over £30,000 will have to take advice before transferring from April.
Money Marketing first revealed last month the Treasury was considering plans to include tradeable annuities as part of the final Coalition Budget.
The Government will publish its consultation on how to establish a market for buying and selling annuities on 18 March, and has pledged to work with the FCA to introduce appropriate guidance and other consumer protection measures.