I’ve been asked for my views on secondary annuities.
I asked myself would I trade my annuity. Of course, I wouldn’t, I wouldn’t buy one. I wouldn’t sell my state pension, I wouldn’t sell my rights to my defined benefit pension scheme, I wouldn’t even sell my right to increases on my pensions.
I am a lucky one, with a property, a little cash, a supportive family and a blindingly successful partner. It’s easy for me to pontificate.
But there are many people for whom an annuity – especially an annuity purchased since interest rates closed in on 0%, who will be regretting their decision to exchange their pension pot for an income for life; for them, the option of cash today may not just be exciting, but the right financial plan.
I have written many times in this blog that those who bought annuities, often unwillingly and unadvisedly, should be given a second chance. I am one who sees the secondary annuity market as that second chance. I also see this market as a means for better hedging of longevity risks for companies and especially pension funds, looking to protect themselves against the inexorable rise in life expectancy.
Having said my piece, here are the specific questions I’ve been asked, and here are my answers.
- What are the key points from the latest consultations from HM Treasury, the FCA and HMRC on the creation of a secondary annuity market? Are there any outstanding issues?
The FCA will remind buyers & brokers of 2nd-hand annuities of legal obligations when dealing with sellers vulnerable due to reduced mental capacity
Annuity providers will only be required to make ‘reasonable efforts’ to obtain consent from relevant beneficiaries of an annuity income.
The FCA is not proposing for it to be mandatory for consent to be obtained from relevant beneficiaries before the annuity is sold.
Consent of those financially connected to an annuity income, such as a spouse, is a tricky area for the resale of annuity income
Sellers of annuities will be required to take “appropriate advice” if value of their annuity is above a certain threshold, (o be set by HMTreasury).
The FCA expects its rules on the secondary annuity market to apply from the Autumn of this year (2016).
- Do the consultation documents on the secondary annuity market raise any important new details and issues? If so, are these significant to the viability of the secondary market?
The FCA identifies a number of annuity market risks: longevity; value for money;consumer inertia; vulnerable sellers; buyer’s conflicts of interest; scams & a small market.
- Do the FCA’s draft rules and guidance go far enough to protect sellers participating in the secondary annuity market? If not, what other risk protections should be included?
There is very little protection for elderly who are being pushed or pressured into selling an annuity by cash-strapped family member.
- What else, if anything, is required in order for the creation of a properly open and transparent secondary annuity market for providers, sellers and buyers of second hand annuities?
It is critical that buyers & brokers of second -hand annuities of legal obligations when dealing with sellers vulnerable due to reduced mental capacity
- Are there any practical challenges that the parties involved in a secondary annuity marketplace continue to face?
The FCA estimates that up to 10 direct buyers could be involved in the secondary annuity market in its first year.
The FCA has proposed that annuity providers will only be able to recover reasonable costs when charging to facilitate annuity income sale.
The FCA does not propose to require pensioners to shop around before selling their annuity income.
This represents a potentially toxic combination where vulnerable purchasers are given inadequate advice, limited choice and mis-buying ensues
- Any other points of interest you wish to add?
UFPLS are part one of pension freedom. Part two is MSAMP (mis-sold secondary annuity market payment) – Paul Lewis on twitter.
If you want to read up on this subject and take part in the consultation issued by the Treasury, follow these links
HM Treasury: Consultation: creating a secondary market for annuities – secondary legislation (21 April 2016) http://www.gov.uk/government/consultations/creating-a-secondary-market-for-annuities-secondary-legislation/consultation-creating-a-secondary-market-for-annuities-secondary-legislation
FCA Consultation Paper (CP16/12) Secondary Annuity Market – proposed rules and guidance (20 April 2016) http://fca.org.uk/static/fca/documents/consultation-papers/cp16-12.pdf
HMRC: Creating a secondary annuities market: tax framework (20 April 2016) https://www.gov.uk/government/consultations/creating-a-secondary-annuities-market-tax-framework