The government has revealed it believes forcing annuity holders to take independent financial advice could be the only way to prevent an annuity re-sale scandal.
In a 35-page consultation paper published alongside the Budget, which confirmed plans for the establishment of a secondary market, the government admits safeguards will be required to stop annuitants losing out once they are allowed to sell on their policy.
“There is a strong case for requiring annuity holders to take financial advice from an independent financial adviser, with a requirement for annuity providers to check this before they enable the annuity to be assigned.
“This mirrors the requirements now in place for when people convert from a defined benefit to a defined contribution based pension during their accumulation phase, where the value of the pension is above £30,000.
“Regulated advice would ensure that individuals receive help tailored to their circumstances and a recommendation on whether assigning their annuity to a third party would be in their best interests.”
It says people would still be at liberty to choose not to accept a recommendation. It also notes regulated advice “can be expensive, as individuals could have to pay several hundred pounds or more, which might be a significant proportion of the value of their annuity.”
However, the government argues following on from the FCA’s recent clarification of rules around simplified advice and new business models for online and telephone advice, there are new, expanded opportunities for the advice sector to meet the growing demand.
Elsewhere the consultation also seemed to rule out annuity buy-backs by the original insurer, which it is feared could be a source of detriment and could undermine the competitive market that the reforms hope to create.
The government believes that the risks of allowing ‘buy back’, effectively terminating the contract, outweigh the benefits, but added it “welcomes views on the potential risks and benefits of allowing ‘buy back’”.
According to the paper produced by HM Treasury, allowing annuity providers to ‘buy-back’ their annuity could also result in some consumers falsely believing that they can only use these new freedoms through their existing annuity provider.
Mark Stopard of Partnership told FTAdviser that the government should not rule out purchases by existing insurers, as this could reduce options available to those with smaller pots. He added that as long as the purchase was within a competitive process, there should be no additional detriment.
Mr Stopard added that the calculation on purchase of a pot would be different for the issuing insurer, which is effectively cancelling out a liability rather than engaging in a more speculative investment.
The government reveals its “preferred approach” is to remove the barriers to the creation of a secondary market - and allow annuity providers and potential buyers to develop the market and its operations, rather than to dictate a rigid mechanism.
The government warned the FCA would monitor the fees and charges imposed by annuity providers.
emma.hughes@ft.com
