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Pension pitfalls: Experts warn second hand annuities ‘minefield’ fraught with risks

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.


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There are 21 comments at the moment, we would love to hear your opinion too.

  1. Who would sensibly want to give regulated advice on this kind of transaction? If the government insist on people being able to take a half eaten jar of sweets back to the newsagents then don’t expect professional advisers to be foolish enough to advise on the merits of such a transaction. Totally impossible to assess fair value. A possible scenario could be as follows – a terminally ill annuitant sells his/her annuity on to an unwitting purchaser who thinks he/she is getting a bargain buying the annuity at a steal. How do you prosecute the now dead annuitant for non-disclosure? Do you then ask his widow(er) to give back the lump sum paid by the purchaser? Utterly silly. If you make a decision to buy an annuity then caveat emptor. George Osborne – STOP opening up more and more cans of worms in an attempt to make everything possible and win votes. Be responsible George and THINK before you speak.

  2. The purchaser of the annuity will do everything to keep the seller alive. Imagine that!

    “No you cant die I will not allow it……quick where is the defibrillator?”

  3. Christopher Petrie 16th March 2015 at 2:09 pm

    @Brian Gannon.

    My understanding is that purchasers of second hand annuities will be funds and institutions not individuals. Thus risk is reduced through numbers and diversity.

    You won’t have hundreds of Seniors on Blackpool beach waving annuity policies in the air whilst Keith Chegwin tries to match up the swaps!!

  4. An odd aspect of the proposal is that the issuing annuity company will not be able to buy the annuity back. One supposes that the past behaviour of certain life offices is coming back to haunt them – after selling poor value products rather than promote the open market option effectively.
    Nevertheless, it seems draconian to stop the businesses with often the most reason to want to buy back the anniuty from doing so; they will extinguish and exactly matching liability and also save the costs of administering the the contract. Lots of insurers won’t want to buy back their old annuities but some might and they could be the top bidders for the reasons stated. It seems perverse to lock them out. It cannot be beyond the wit of the reguators to devise a system to keep the life companies honest – compulsory open bidding perhaps?
    I understand the Treasury’s anxieties – but it seems a bit of a silly restriction.

  5. Even if we did get involved and charged a viable fee, we’d be accused of “rip off charges” by our value for money MPs and self appointed experts.

  6. Echoing most of the above comments above. I think this is more of an aspiration than a future change in front of the election. Steve Webb (He of “Buy a Lamborghini” fame) trotted this pearl of wisdom out some months ago. I, as a Licensed IFA will not be getting involved in this nightmare scenario if it does happen.

  7. it wont be longer before we see investment vehicles cropping up to buy the annuities en-mass (probably unregulated schemes) which some clever advisers will then tell their younger SIPP clients to invest in !

  8. Does anyone know whether this also applies to DB benefits?

    Given the atrocious communtation factors out there, it would be great if clients could take the full DB benefit as pension and then sell it on at a competitive rate.

  9. As if I wasn’t already suspicious of this, now Groves uses the dread word “crowdfunding” to suggest a potential source of investment, making it clear that this is for mugs only.

    Here’s an idea: why not sell your annuity for £50,000 and then invest that cash in an unregulated fund investing in second-hand annuities. Remembering previous success stories in this area, I’ve no doubt that such funds could offer a return of 8% per annum, because uncorrelated something something. And when it inevitably goes bust you claim your stake back off the FOS and FSCS. It’s win win!

  10. I made a similar point as Danby Bloch did when this was first mooted i.e. either a statutory calculation of value like with a CETV or compulsory open bidding perhaps.
    If someone wants to sell at below the CETV or there are no buyers at the CETV, that would be for each party to decide the merits.
    Without this someone IS going to get shafted royally and most likely as others have said the consumer and the adviser (if they get involved in the conversation) will likely get the blame.

  11. @Christopher Petrie, I think your understanding is not necessarily right. Although I am sure there will be institutions bulk buying and creating a great new idea – they could call it Traded Annuity Policies – it might be as brilliant as the old days when we had Traded Endowment Policies – what happened to them? I was told they were brilliant and risk free? Apparently the diversity made these TEP funds virtually risk free?

  12. What next? Sell your state pension?

  13. When a DB scheme member wants to swap a defined benefit for a transfer value, an elaborate TVAS is mandatory. Given that annuities are as defined and guaranteed as it is possible to be, perhaps we will see an annuity equivalent of the TVAS…

  14. Does anyone know whether this also applies to DB benefits?

    Given the atrocious communtation factors out there, it would be great if clients could take the full DB benefit as pension and then sell it on at a competitive rate.

  15. @Brian – And the FCA’s member on their Consumer Panel, Dr Debbie Harrison told us that Life Settlement Plans were an uncorrelated asset class, which whilst you shouldn’t plough large proportions of a clients assets in to them, 5-10% might be suitable and yet the F-pack then told us they were all toxic (after one of them was brought down by an error in their ISA status and the robbery of £103 million from under the noses of various custodians, don’t forget the FSA didn’t know the £103 million had disappeared despite having ARROW visits and had Keydata deemed insolvent due to the ISA tax error and at the time were looking to reassure investors all was fine and dandy)
    How is buying back annuities going to be any different to buying back whole of life policies and endowments?

  16. Independent research has shown that annuities are not poor value for money – there is however a perception that they are.

  17. The one scenario in which this might work to the benefit of consumers is transferring the CETV to buy an enhanced/ill health annuity for which the annuitant didn’t qualify when buying the original one. But it’s hard to see how taking a tax-assessable lump sum is likely to be good for any but an extremely small proportion of existing annuitants.

  18. I assume the reason why it is legislative change is so the annuity is unwound and reversed back to a drawdown plan rather than reversed and paid out all in one taxable lump sum as income.
    At the moment the rules don’t allow it without horrendous tax consequences, changing he rules will give more flexibility, but it doesn’t mean that exercising the option to reverse will be wise for many people at all.

  19. The one scenario in which this might work to the benefit of consumers is transferring the CETV to buy an enhanced/ill health annuity for which the annuitant didn’t qualify when buying the original one. But it’s hard to see how taking a tax-assessable lump sum is likely to be good for any but an extremely small proportion of existing annuitants.

  20. At a recent training event I attended, the foundation stone for any advice on Income DrawDown was emphasised to be the client’s Minimum (secure) Income Requirement (MIR), which seems eminently sensible. One might well take a similar approach to anyone seeking assistance with/advice on encashing their pension fund/s. If their secure income fails the MIR test, the conclusion has to be Don’t do it (and, if you insist on doing so anyway, then I cannot help you).

  21. I hope that as this is effectively someone giving up a defined benefit that only advisers who hold G60 / AF3 will be able to risk their livelihood with this type of business. I for one don’t want to get involved but suspect that the FCA will say I have to if I want to remain an IFA. Therefore my solution is to not sit AF3 anytime soon so I can legitimately not participate in this area and retain IFA status as applied to current DB transfers.

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