The Treasury is set to publish within the next few days its developing plans to introduce a secondary market for annuities, allowing an estimated 5 million annuity holders the opportunity to resell their income stream.
There are an estimated 6 million annuity contracts paying income of £13.3 billion a year (source HM Treasury “Creating a secondary annuity market” March 2015). Tom McPhail, Head of Retirement Policy: “For many annuity holders the certainty of a guaranteed income for life will remain the best use of their retirement savings, however others will welcome the opportunity to cash in their annuity for a lump sum or to exchange it for alternative terms. We may see investors who bought a single life annuity wanting to add on death benefits for their spouse, or perhaps to cash in part of their income for a lump sum.
The development of this market will extend the pension freedoms to millions of retired investors who will no longer be locked into their existing contract. However it is also important to note that it will not compensate them if they bought a poor value contract to start with and some investors may find the lump sum offered to them will not be an attractive deal.”
How the market will work
We anticipate that the Treasury will look to use the existing annuity broker market to create competition for those wishing to cash-in their annuity. By offering an existing income stream out to a panel of competing potential purchasers, the broker will be able to secure the best possible deal for the customer.We also anticipate that annuity holders may be allowed to sell their annuity back to their existing provider. This will simplify the transaction however it also increases the risk the investor may not get a competitive price. For smaller annuities where there may not be a competitive market of bidders, this ‘buy-back’ may be the only option.
Anticipated timetable
- December 2015: Treasury update
- Spring 2016: FCA consultation
- Summer 2016: Further Treasury and HMRC consultation work
- April 2017: Launch
Underwriting
Prospective annuity purchasers are likely to require potential annuity vendors to undergo some underwriting before completing the transaction. This is because the income stream to the purchaser will only continue until the original annuitant dies; in order to offer a price therefore, the purchaser will want to be able to take a view on the annuitant’s life expectancy.
Consumer safeguards
One safeguard being considered is for investors to be provided with a ‘reverse calculation’ to sense check the value of the deal they have been offered.
For example (source Hargreaves Lansdown): George buys an annuity paying £100 a month at the age of 65. The purchase price is £20,000. He is now 75 and is looking to sell his income in exchange for a lump sum. He is offered a cash-in price of £10,000. A ‘reverse calculation’ would show that A 75 year old in good health with a fund of £10,000 could only buy an annuity income of £65.22 a month on the open market. This information allows George to make an informed decision about the loss involved in cashing in his annuity income for a lump sum.
Tax
Both the annuity income and the lump sum would be subject to income tax; depending on an investor’s circumstances, a lump sum could push them into a higher tax band, resulting in them paying more tax overall.
The role of advice
The FCA and the Treasury are also looking at the question of advice and when investors should be required to pay for it. For some investors, paying for regulated advice could be an important protection; others will be happy to make their own decision or may simply feel the cost of advice will outweigh any benefit. Currently any safeguarded rights (such as a Guaranteed Annuity Rate) trigger an advice requirement where the fund is worth £30,000 or more. There may be a case for increasing this threshold to £50,000 due to problems for those with smaller pots getting access to advice.
