Plans to create a re-selling market for unwanted annuity contracts will “die a death”, with the outcome being a potential mis-selling scandal, according to financial advisers.
Pensions minister Steve Webb reignited the idea of facilitating a secondary annuity market at the start of this year having previously suggested it last October, prompting criticism from various industry experts.
Jonathon Howard, head of corporate clients and chartered financial planner at Courtiers, told FTAdviser that he cannot see any real substance to the suggestion, which would be unlikely to progress under a a new government after May unless the incumbent pensions minister was still at the helm.
Mr Webb said details were being drawn up by the Department for Work and Pensions and that he was seeking cross-party agreement for proposals that could be implemented by the next government, adding that “advice or guidance” would need to be made available to those seeking to sell up guaranteed income streams.
Mr Howard agreed that proper advice would be crucial to avoid consumer losing out, but that this would further erode the lump sum received.
“Until you get further down the line it will be impossible to know what the true value of your annuity contract is, but I suspect for providers to get involved on the scale needed to make these plans workable, the deals done would need to favour them.”
While not all life insurers initially rejected the idea, many have picked apart the argument and called for better consideration of the risks involved, especially to those consumers at the lower end of the income scale.
Mr Howard stated that larger providers with legacy back books built up through multiple acquisitions may welcome the opportunity to get rid of these long-term commitments.
“Guaranteed annuity rates offered in the past are still crippling companies, so I reckon many would happily walk away for a cash payment, but I fear many of those most willing to do those deals would be those least likely to realise the true value of their annuity.”
Andrew Pennie, marketing director at retirement adviser Intelligent Pensions, was also sceptical about the plans, agreeing that it is most likely to be those that are most desperate that will take up the offer, leading to poor outcomes and potentially more poor press for the industry.
“Providers will have to make money if they are to do the marketing and administration for something like this, so I fear consumers won’t get fair value.”
However, he conceded that there is likely to be demand from those happy to exchange their annuity contracts for cash - and this may well be matched by supply.
“I also think that it is consistent with the freedom and choice reforms, so I don’t see why a government of another colour wouldn’t continue to push these plans through.”
William Hunter, director at Hunter Wealth Management, told FTAdviser that the plans are unworkable and while the rates on annuities may not have been great, the lump sum conversion will be worse.
“I’m not sure where this fits with Treating Customers Fairly to be honest, it’s like selling the family silver.”
Mr Howard explained that while some have looked at a similar model in the US, they have tools to help consumers determine whether they are getting fair value.
“Obviously this would help, but I suspect that there are still too many variables at an individual level for it to really work effectively.
“For example, how would these take account of medical conditions that the person my suffer from - I appreciate that there are certain ‘points-based’ assessments, but these can’t cover everything, and certainly not with total accuracy - any such guidance would be ballpark figures at the very best.”
peter.walker@ft.com
