I returned from a long walk this morning to a barrage of negativity on twitter. The outrage of the pensions twitterati was reserved for the Government’s pre-budget leak that people will be able to buy and sell annuities as if they were gilt-edged securities.
In truth, this currency of death has been traded for centuries, witness Gogol’s novel Dead Souls or the current American market for viatical settlements.
The death of a loved one is a personal tragedy but the death of a cohort is a commodity.
I really don’t get the hostility to their being a secondary annuity market; here are the five reasons Webb and Osborne are right to pursue this policy.
- People who have bought annuities , have often done so for the wrong reason- or for no reason other than it was a by-product at getting at the tax-free cash. Many of these people were poorly advised and many were able to buy without advice. The alternative to a secondary annuity market would be a massive mis-selling review from which only lawyers and actuaries would win. As envisaged in this article in the Telegraph.
- There is demand from insurers, banks and pension funds for annuity income streams to offset longevity risk within existing pension books
- The sale and purchase of annuities need not be as inefficient as supposed. Conversations I have had with organisations such as Partnership, suggest that this is not the inefficient trading process it has been portrayed as.
- People’s circumstances change, those who have purchased annuities in the past for the right reason, may find they no longer need the income stream but do need the capital. Privately purchased insurance products should have property rights (e.g. a transfer value).
- If we are to have pension freedoms, they should not be selective freedoms. When the freedoms were announced last March, I pointed out that they did nothing to help those who had purchased annuities in the past five years. While false starts are unlikely to offer full restitution, they can at least offer pre-2015 annuitants a way out!
I think a secondary annuity is the least bad option. This blog campaigned for a radical change in the annuity purchasing process since it opened in January 2009. The purchasing of annuities without advice, without medical evidence and without any attempt to get best value over the past six years has been an appalling problem which has stored up grief for decades to come.
This move by the Government needs to be supported by the construction of a properly ordered market. It needs people to properly understand risk and there will need to be a lot of energy put in to ensure that people are not “fleeced on the way in as well as the way out”.
But it also needs to be supported by pension people who have been notably silent over the period when the mis-purchasing of annuities has been going on.
Case study;
Norris Cole and Ramsay Clegg
I wanted to find two very similar characters who go on and on. I had originally landed on my friends Alan Higham and Andy Young (a pair of evergreen moaners) but as both are friends and are capable of outwitting me, I’ve landed on Norris Cole of Coronation Street and his fictional brother Ramsay Clegg.
Those not familiar with the soap will need to be reminded that Norris is the annoying git who runs the cabin , has been around for ever and shows so sign of popping his clogs. He had a brother Ramsay Clegg who was not annoying but actually did die (on a plane to Australia).
Had a mortality expert been asked in 1996, which brother would have outlived the other, I doubt he’d be able to split the two. But Norris is already 19 years ahead and counting,
Now let’s imagine Norris had bought an annuity from me in 1996 and I’d been offered the chance to buy the annuity on his brother Ramsay, a few weeks later, I might have said
– ‘good move, Ramsay’s annuity income will cover my liability to Norris’.
But this would have been a disastrous strategy. Had I got Norris’ income stream and had minimal liabilities on the dead Ramsay, I would be (financially) in clover.
As an individual, I am taking a huge risk; but if I have thousands of Norris’ and Ramsays on my books , I would be able to balance my liabilities with my income streams and sleep easily at night.
This example shows that buying and selling annuities can be a very risky thing for people like you and me. But if I have thousands of Norris and Ramsays as clients, the bad luck of Ramsay dying on a plane and of Norris living healthily 20 years, would be lost in the crowd.
If you’d like to listen to an intelligent debate on this subject involving Steve Webb, Chris Noon, Alan Higham and Paul Lewis, follow this link,
