Pensions minister Steve Webb has admitted plans to open a secondary market for 5m legacy annuitants to re-sell their policies and take advantage of pension freedoms would need to include the provision of advice or ‘guidance’, amid criticism from industry experts.
Speaking to FTAdviser, Steve Webb confirmed he was working on plans to get the pension freedoms extended to those who are receiving an annuity but who might prefer a cash lump sum.
However, referring to concerns raised over the plans from some quarters he cited the need for “advice or guidance” to be made available, in what some may see as a reference to potentially extending the existing pension freedoms free guidance provision.
“We wouldn’t want people being ripped off, so we would need to think what advice or guidance should be available.
“But if we can make sure we have a competitive market with several potential buyers then people can shop around for the best price and turn down any sale if they don’t think they are getting a fair price.”
Mr Webb cited Association of British Insurers figures showing there are around 6m annuities in payment worth around £11bn per year and strong demand from the public for a re-sale mechanism for annuities.
He said he hopes to have cross party approval for plans to be implemented by the next government following the May election.
“I have already heard from people around the country who would like to see this change made, and I hope that this government will confirm its intention to make the necessary changes.
“Whilst we can’t say that this is 6m people (because some people will have more than one annuity) it wouldn’t be stretching it too far to suggest we could be talking about ‘up to 5m people’, which this suggests that the number of people who might be interested could be very substantial.
“We are therefore working within the DWP to look at extending the freedoms to people with annuities by allowing them to ‘assign’ or ‘sell’ their annuities.
“Realistically the most we could do would be to make an announcement and produce a consultation this side of the election, but if all parties signed up to the proposition then we could implement the measure early in the new parliament.”
Mr Webb added he would “assume that similar taxation rules would apply in this case as with the Budget freedoms”, meaning lump sums would be taxed at the point that they were spent.
“As with the Budget freedoms, this could have the side-effect of bringing forward tax revenues, which is something which might appeal to the chancellor,” he noted.
Mr Webb’s proposal has been met with a cautiously positive response from several providers, many of whom say they broadly like the principle but are concerned over how it would work in practice.
Hargreaves Lansdown’s head of pensions research Tom McPhail proposed a couple of different possible methods for the pensions minister’s plans, which both exposed significant difficulties for both providers and customers.
Jim Boyd, director of corporate affairs for Partnership, said he believes that where the annuity income stream continues but the annuity holder sells it to a third party in exchange for a lump sum is an attractive option.
Mr Boyd said: “From my perspective I can’t see why there would be problems with it in theory, subject to greater detail and how it will work.
“I think it would make annuities more attractive. People still want a guaranteed income but this gives options as to what market price is and the tax liability. It is another option for a rainy day and as it could free a lump sum.”
Alan Higham, retirement director at Fidelity Worldwide Investment, stated that Mr Webb’s plans seem like a logical extension to the pension freedom rules, with the creation of an orderly market to allow annuities to be bought and sold being an “undoubtedly noble” notion.
However, he pointed out that an annuity must stop or alter payment when the original owner dies, questioning how the new owner would know this had happened, along with other issues.
“You would have to agree to regular certification of being alive in order to sell the annuity. If you moved house or just failed to reply to a certification of existence then payment would cease, as both the cost of certification and the risk of early cessation of payment reduces the value of the annuity.
“Thus only those in good health, prepared to go to a doctor for an examination to prove the fact, will be able to sell such policies. In other words, only the healthy, who stand to benefit the most from owning an annuity, will have a chance of selling one.”
He added that the only way the plans would work is if the original insurer made an offer across all its policies, particularly the smaller ones, where the risk of sick people selecting against you is minimised.
Phoenix Group carried out a similar exercise at the end of 2013, so there may be little need for further government legislation.
Jamie Jenkins, head of pensions strategy at Standard Life, said that the idea is understandable and for some people may be entirely appropriate, but a wholesale shift away from existing guaranteed income streams towards cash sums, could have an adverse effect on people’s standard of living in retirement.
peter.walker@ft.com
