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Robert Reid: The dangers of Osborne’s tradeable annuities plan

In preparation for a summer holiday visit to a remote house in Europe I started to research the cost of car hire. I decided I needed to add in a GPS system, only to see the cost for my rental go up faster than a FSCS levy.

So I decided to buy a GPS unit instead, reasoning I could use it on subsequent trips. However, the complexity of features and the range of prices meant hours of further research was necessary. In short, a good idea with complications is quite possibly no longer a good idea. Which takes me to selling annuities…

It is ironic that following FCA action to stop investing in traded life assurance plans (where the investor’s hope is for an early death) we are now doing the opposite, preferring annuity policyholders live as long as possible.

Institutions and/or final salary schemes may seek to buy, more likely than not, bundles of annuities and the parceling up of them prompts unfortunate memories of sub-prime lending being securitised.

In the recent past, poor health was an advantage in annuity purchase. In selling an annuity, however, the opposite will be the case. Further, as the annuitants or their spouses will need to be confirmed as still alive for the annuity to continue to be paid, this will make any bundling more problematic unless a common database is in place that can validate as such.

As far as I can see, the holding insurer has the final say on the annuity’s assignment and in addition this provider cannot do the equivalent of a share buy back, which I think is a mistake and should be revisited.

There is, however, a proverbial elephant in the room: the health of the annuitant or their spouse. It is therefore surprising health is one topic the discussion on the second hand market for annuities has largely ignored. It will inevitably be the most contentious element of any pricing of an annuity put up for sale.

Recent articles in the press have been less than helpful with some ridiculous estimates of what someone could receive without regard to their longevity. This, after all, will be a key determinant of any annuity’s value.

In Jane Austen’s Sense and Sensibility it was written, “an annuity is a very serious business”. Well it is even more serious now and if someone swaps income for cash then spends it all who exactly will they fall upon for financial help? Worse, will this be another instance of misselling? Or should it be misselling squared (i.e. being sold the concept of selling your annuity)?

The sale of annuities is not new. It already happens in the US, where people who have been awarded structured settlements then sell their annuities for cash, often encouraged by less than scrupulous advisers and/or family members. All the careful structuring is cast aside for a lump sum.

In the years that come I can see annuity re-selling as the pension transfer review revisited. If firms want to play in this place they had better get their process and filtering right. If not, those of us left when they bail will be left with a FSCS bill that makes current levies look like a church collection.

Robert Reid is managing director at Syndaxi Chartered Financial Planners

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Whose plan was it, really, though?

  2. Following the Chancellor’s announcement regarding the new ability for clients to sell their annuity income to a willing 3rd party, I’ve decided to become a product manufacturer.

    The details are very “hush hush” at the moment but I intend to structure it as an unregulated collective investment scheme that allows investors to buy a portfolio of high-quality annuities at huge discounts and reap the benefits of long-term secure income.

    Potential buyers need not worry if they don’t have the capital available, as I’ve arranged favourable financing via a high-street bank at very attractive rates (they will just need to secure the loan on their home).

    Given the discount at which I will buy the annuity income, this scheme is guaranteed to make money so there is absolutely no reason for customers not to engage as soon as possible.

    I am putting together marketing literature at the moment – again, the detail is confidential within the new operation but I am delighted to share with you the domain name I have registered:

    Second Hand Income Trading.com
    ——————————————————–
    This is – hopefully obviously – a joke but it was designed to highlight a very real risk.

    I have, in the past, had experience of a Geared Traded Endowment Plan – a “product” that offered clients the opportunity to borrow lots of cash in order to buy a portfolio of 2nd hand endowments.

    How long will it be until some entrepreneurial type has this exact idea?

    I can already hear the sound of PCs humming as the Claims Management Companies draft their template complaint letters.

  3. Peter Siebelt 8th May 2015 at 3:58 pm

    Well written as always Robert

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