Secondhand annuity market extends choice to five million pensioners
Pension reforms taking effect next month will be extended to millions more people in 2016 after the government confirmed in the Budget that it would consult on opening up a ‘secondhand annuity’ market.
The risks inherent in buying and selling annuities are considerable, however, with industry and consumer groups uniting to warn against the dangers facing annuity holders tempted to exchange their guaranteed income for a short-term cash boost.
Restrictions on the trading of annuities will be removed next year to allow pensioners to sell their annuity contracts, under plans already set out by the Treasury.
The consultation document on second-hand annuities was published alongside the Budget and suggests that annuity holders may be forced to seek advice before they sign away their contracts.
The change would be relevant to more than five million people who have already used their pension pots to buy annuities and so will be unable to take advantage of new so-called pension freedoms being introduced next month.
Steven Cameron, regulatory strategy director at Edinburgh-based Aegon, said some annuity holders will feel they have “missed out on more flexible options”.
“Proposals to allow them to sell their future annuity instalments to a third party in return for a lump sum are likely to have an appeal. But it won’t be right for all – and for many, could be a very bad decision so it will need to be carefully designed to offer consumer support and protection,” he said.
“Anyone turning future annuity income into cash is giving up a guaranteed flow of income – for their and possibly a partner’s future life. Swapping this for a lump sum, calculated based on a range of factors, is undoubtedly a complex and risky decision and specialist advice would be essential.”
The consultation details make it clear just how complex a secondary annuity market would be, said Jamie Jenkins, head of pensions strategy at Standard Life, pointing to implications around tax, underwriting, valuation and administration.
“It also raises the question of whether advice would need to be mandated, given the obvious parallels with those wishing to transfer out of DB pensions,” he said.