The Treasury was ready to mandate guidance and set a “high advice threshold” for secondary annuity sales before scrapping plans to introduce a market for them, Money Marketing has learned.
The government planned to introduce a market for savers to cash in their annuities from 2016. However, in the 2015 Budget, this was pushed back to 2017 in the face of pressure from providers, who warned that establishing a functioning market still posed risks to consumers.
The plans, which were due to bring an estimated £535m into government coffers in their first year, were eventually dropped in October 2016.
The government said it had consulted further with the industry and had decided that “the consumer protections required could undermine the market’s development”.
While only 5 per cent of people who held an annuity were predicted to have wanted to sell it, campaigners claimed many low-value or elderly annuitants would not get the support they needed to make the right decision about selling up.
A 2015 consultation document said the government planned to offer guidance to retirees on second-hand annuities through Pension Wise, with a requirement for financial advice for annuities above a certain value. However, there was no further detail published in any of the government’s literature around the reform on what format this might take or its potential impact.
Three potential options for an advice requirement were being lined up before the government decided not to create a secondary annuities market, according to a Freedom of Information request from Money Marketing.
Government’s cards on the table
The Treasury has confirmed that while “no decision had been made about the advice requirement” at the time the proposals for a secondary annuity market were scrapped, “internal analysis had been conducted, with three potential options outlined”. The department provided slides to Money Marketing, detailing prospective ways of getting customers selling their annuity the right advice, as well as additional impact assessments from officials.
The documents note that the Treasury specifically consulted with advisers and insurers, and had developed concerns that an advice requirement could be a barrier to an effective market because “there might not be enough advisers that are willing to enter the market”, and “where consumers are advised not to sell but want to go ahead anyway, insurers might not let them”.
One option, described as the Treasury’s “original intention”, would have been to make Pension Wise voluntary for those looking to sell their annuities, and have a lower advice threshold for, say, annuities worth at least £3,000 a year, that would cover between 15 and 20 per cent of individuals looking to sell.
The analysis noted that while “consumer groups and industry [would] likely be broadly accepting of this level of protection”, it still “raises concerns around availability of advisers and insistent clients”, and “could put up barriers to selling an annuity, compounded by forcing individuals to pay for advice”.
An alternative would have been to set the advice threshold higher, at £5,000 for example, covering 5 to 10 per cent of individuals, to ease concerns around availability of advisers and insistent clients, while giving those with lower incomes the choice to go to Pension Wise.
However, the government noted that “consumer groups and industry [are] likely to view this as inadequate consumer protection”.
It added: “[It] could be possible to use strong communications and marketing to further encourage use of Pension Wise, but there would be uncertainty with this approach.”
The FOI request reveals the Treasury’s “recommended option” was to set a high advice threshold of around £5,000 – covering 7 per cent of annuities currently in payment – and mandate Pension Wise support for annuitants with an income of more than £1,000.
Royal London director of policy Steve Webb says: “The challenge with setting up a secondary market was how to prevent consumer detriment without making the advice requirement so onerous that the cost was disproportionate.
“It is interesting to see that the government was planning to go for a very high threshold which would have meant most people selling their annuities without advice.”
Were the option to go ahead, around 40-50 per cent would have received mandatory guidance, with 5 to 10 per cent getting mandatory advice, leaving roughly 45 per cent to seek guidance on a voluntary basis.
Having been consigned to the Treasury’s rubbish bin, they should now be set alight so there is no chance of them every resurfacing.
This would have ensured those with lower incomes received free support from Pension Wise, and the plans would have received the support of consumer groups and industry, the government said.
“There are a number of benefits of mandating use of Pension Wise for those consumers who have a reasonable-sized annuity, but who are unlikely to have a trusted financial adviser,” the analysis reads.
“We would have control over Pension Wise content and format, unlike any information that consumers get through an adviser. We would be able to explain the complex issue around selling an annuity in language that we know to be clear and simple, as it will have been tested with consumers. We could push people towards our calculator tool to help them understand the value of what they might give up by selling.”
How many would have taken advice?
The Treasury noted FCA data showed roughly 38 per cent of all personal pension sales in 2014 were advised, but this would have been a “considerable overestimate” of those with annuities in the secondary market who would have taken advice rather than guidance if not forced to.
It said: “This is because it will be clear to these consumers that Pension Wise can offer support for free, while the costs of financial advice are likely to be considered disproportionate relative to the value of many annuities”.
Without other data that would make for a better estimate though, the Treasury said on this basis it could assume that 279,000 people would be required to take guidance, of whom 174,000 would use Pension Wise and 105,000 would take advice.
Advice was always the second-hand annuity market’s Achilles’ heel
The government was right to abandon plans to allow people to sell their annuities on a secondary market. At no point during the consultation did evidence emerge that a competitive market would exist for people’s unwanted annuities, leaving savers at risk of a double rip-off – once when they bought their annuity and again when they sold it.
If the government had pressed ahead with introducing secondary annuities then it would have been logical to introduce an advice requirement similar to the one that exists for defined benfit transfers. However, this FOI reveals the complex challenges such a requirement would pose.
For a start it is far from obvious the point at which advice or guidance would have kicked in. The Treasury suggested income levels of somewhere between £2,000 and £5,000, but the value of such income would have depended on a variety of things including someone’s age, health and lifestyle. Applying a blanket advice requirement based on annuity income level would therefore have created an unlevel playing field.
There would also have been a question around how this would have applied to people cashing in multiple small pots. Would an advice requirement have been applied based on the overall value of pots someone had to cash in, or the value of each individual pot?
The idea of mandatory guidance could also have proven problematic. We have already seen various reports suggesting people are having to wait weeks or longer to get an appointment with the government’s official Pension Wise service, so adding yet more demand would only have made this worse.
Wherever you look with secondary annuities there are serious problems without obvious solutions. Having been consigned to the Treasury’s rubbish bin, they should now be set alight so there is no chance of them every resurfacing.
Tom Selby is senior analyst at AJ Bell