A pensions lawyer has raises several concerns around government plans to set up a second-hand annuity market, something expected to be given further detail in today’s summer Budget.
Speaking to FTAdviser, Marcus Fink, a partner specialising in pensions at Ashurst, said that allowing those that have already bought an annuity to take advantage of the 6 April pension freedoms could be the start of “the road to ruin”.
The Treasury’s consultation into suggestions made during the last government’s tenure finished last month, with various stakeholders calling for better consumer protections to be put in place and concerns about unintended consequences.
Mr Fink explained that the problems associated with annuity sales are numerous, stemming from the fact that it is difficult to see the second hand annuity market as operating in any form other than a ‘swap’ arrangement.
Annuity holders would assign to a third party the right to any payments under their annuity policy and would receive a lump sum - or perhaps another product such as a flexi-drawdown arrangement - in return, according to Mr Fink, with the third party receiving what would have been the policyholder’s annuity income until the date that the policyholder dies.
He argued that this structure creates a number of issues, firstly that broadly one third of annuities will pay an income to a surviving dependant when the main policyholder dies, begging the question of whether the dependant’s pension be surrendered or remain in place?
Similarly, a large number of annuities have been sold with guarantees whereby dependants receive annuity payments if the policyholder dies within a set period of taking out the policy - usually five to 10 years - which again raises the question of whether the guarantee will have to be surrendered?
“In terms of the protection needed, this will have to be carefully thought through and the correct balance achieved between the cost of advice and the value of the annuity being given up, bearing in mind that policyholders will, on balance, be worse off in the long term by selling their annuities,” said Mr Fink.
He added that there are significant tax issues in the fact that sale proceeds from an annuity will generally be tax free. “If the policy is being sold to an institution, the purchaser will not pay income tax, so this is an issue for HMRC.”
Finally, in terms of pricing Mr Fink also pondered how the presumption that the buyer is being ‘selected against’ will be overcome without very detailed (and costly) medical examinations.
“This will reduce the amount paid for annuities dramatically, leading to poor deals for consumers,” he added.
peter.walker@ft.com
