Advisers have revealed that yesterday’s (18 March) headlines about annuity re-sale ahead of the Budget resulted in fed up pensioners already beating a path to their doors.
However, industry experts who picked through a consultation document published alongside the Budget were left questioning whether anyone will actually ever be able to sell on their guaranteed retirement income pot.
The 35-page paper threw up a number of concerns about annuitants freeing their cash that many suggested they are unlikely to be cost effective in practice.
Simon Nicol, pension director at Broadstone, said the report made it “pretty clear that neither the government nor anyone else has much idea how to actually value a second hand annuity”.
While it proposed that anyone looking to sell on their annuity may be required to speak to an IFA before making the decision, Mr Nicol pointed out: “It is all very well imposing an advice requirement, but who will be around with any experience of advising on this?
“We are already receiving calls from people wanting to sell their annuity, but it is likely that the offer they receive will be smaller than they’d like. This is unlikely to be the windfall many are hoping for.”
Martin Tilley, director of technical services at Dentons Pension Management, said the government’s report rightly highlighted that advice will be required for annuity re-sale and that this is likely to have to be paid for by the individual.
The cost of advice for the annuity will make the likely sale even less attractive and therefore he noted that “as a concept, the likelihood of a real secondary annuity market must be extremely small”.
He added: “It is also extremely likely that IFAs will not want to provide advice on the sale, as specialist knowledge would be required and the likelihood of a positive recommendation must be slim.”
Alan Higham, retirement director for Fidelity Worldwide Investment, said the paper on annuity re-sale only worked to highlight that a minority will benefit from such a policy and for most, selling their policy will not lead to better outcomes.
“The consultation document clearly sets out the huge risks involved, not only for the annuitant selling their policy but their dependents too. The consent of the original annuity provider will be required and they would appear to have the unfettered right to say no.”
The paper also stated that those on means-tested benefits, or that could run out of money and need more state support, could be prevented from selling their annuity, taking another 650,000 out of the potential pool.
According to the paper, analysis of administrative and survey data suggests that around 13 per cent of annuities are paid out to those in receipt of means-tested benefits, primarily pension credit and housing benefit.
For social care, modelling using survey data estimated that around 15 per cent of those receiving state support with their social care currently have annuities.
Mr Higham stated that the document itself is not overly optimistic. “Having read the detail, it acknowledges that it may not be workable entailing risks for the most vulnerable in society and would deliver poor value in most cases given the significant frictional costs involved.
“There is no cost/benefit analysis performed to show that this policy will offer clear benefit, but there are clearly significant costs and risks involved.”
The paper also ruled out annuity buy-backs by the original insurer, as the government revealed it feared this could be a source of detriment and could undermine the competitive market that the reforms hope to create.
John Fox, director of the pension provider Liberty Sipp, commented: “Forget actuaries, the chancellor will have to employ the services of Stephen Hawking to come up with a formula for calculating the value of annuities.
“On a technical note, pension companies don’t keep their all their assets in cash, and they will need to sell huge amounts of other assets if there is a run on them; this could take many to breaking point and be potentially cataclysmic for the industry.”
emma.hughes@ft.com
