As revealed last week by FTAdviser sister title the Financial Times, the chancellor has confirmed the pension freedoms will be extended to around 5m people who have already bought an annuity, with legislation set to be in place from next year.
From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original contract.
The government emphasised that this approach “fully recognises” the contractual agreements between the annuity holder and the annuity provider, and “does not unwind” those contracts.
Instead, it allows the annuity holder to access the value of their property rights where they can find a willing buyer. The annuity provider would continue to pay the payments for the lifetime of the annuity holder, but would reassign those payments to the purchaser.
These changes will allow the holder to access the value of their annuity where they can find a “willing” third party buyer.
Speaking to FTAdviser in January, pensions minister Steve Webb said a secondary annuities market would be targeted at institutional investors such as insurance companies and pension funds, who have often called on the government to launch longevity-based investment products.
The government has now officially backed this policy, stating it expects that “obtaining the right to annuity payments” could be “attractive” to a broad range of institutional investors and will be consulting over who should be permitted to purchase the annuity income.
However, it does not consider annuity income purchased on the secondary market to be appropriate for retail investors, owing to the difficulty in determining a fair price.
This follows a previous ban on sales to mainstream consumers of life settlement products, which are similarly based on the persistency of third party policyholders.
Royal London previously told FTAdviser that it would be “unlikely” to participate in a re-sale market in the future.
The government added the proposal will not give the annuity holder the right to sell their annuity back to their original provider, and it “is not minded” to allow the original annuity provider to purchase, and then discontinue, their own customers’ annuities.
Currently people wanting to sell their annuity income face a 55 per cent tax charge, or up to 70 per cent in some cases. The government will remove this charge, so people are taxed only at their marginal rate.
A consultation looking at what measures are needed to establish a market to buy and sell annuities is set to be published alongside this week’s Budget on Wednesday (18 March). The government will also be working with the Financial Conduct Authority to introduce appropriate guidance and other consumer protection measures.
Chancellor George Osborne said: “For most people, sticking with that annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose - the same freedom we are offering those approaching retirement in April this year.
“People who’ve worked hard and saved hard all their lives should be trusted with their own pension.”
Claire Trott, head of technical support at provider Talbot and Muir, said the theory should be welcomed, but warned of downfalls in annuity purchase prices.
“The company buying the annuity will not be doing it for the benefit of the annuitant, they need to make money on the deal or they wouldn’t be offering the service.
“An annuity costs a significant amount to set up and this will have been factored into the level payable to the annuitant; this will mean that even if the annuity has only been in payment a short while they will not get back anywhere near the purchase price.”
donia.o’loughlin@ft.com
