Advisers and providers have reacted to the government giving further details of its plan to set up a secondary annuity market from April 2017, with many predicting another ‘insistent client’ problem in the works.
The consultation response confirmed there will be consumer protections to include advice where fund size above a threshold, although these are yet to be ironed out.
The Pension Wise guidance service will also be extended to those looking to exchange their annuity contract for cash.
Given that advisers are already embroiled in the issues around so-called ‘insistent clients’ wanting to give up defined benefit pensions for cash - with the Personal Finance Society revealing that 80 per cent of its members reject such transfers outright - many IFAs told FTAdviser they are likely to avoid the secondary annuity market.
Carl Lamb, managing director of Almary Green, a firm which changed its requirements pre-pension freedoms to reject insistent clients, said he “wouldn’t touch this with a barge pole”, adding that the plans are “flawed with all forms of issues and potential future liabilities”.
Derbyshire Booth managing director Greg Heath also said he will be steering clear until the market is well established and the risks fully understood. “You only have to look at the debacle with pension freedoms and the serious log jams it caused between the public perception versus the mechanics of the pensions advisory sector.”
Matthew Harris, owner and IFA at Dalbeath Financial Planning, said he was worried that, in the early years of this new regime, there will be only a few buyers of second-hand annuities, who will be offered really low prices.
“Sadly I foresee consumers being exploited by marketing campaigns offering cash payments, and making decisions that will really damage their long term income.
“I am glad there will be a requirement to get some advice for larger annuities, but I think that this is certainly going to be both another ‘insistent client’ issue with advisers fighting off requests from consumers to rubber-stamp bad decisions,” he added.
Douglas Baillie, director at Douglas Baillie Wealth Management, questioned what the provider fees and tax consequences would be. “This is a probably a disguised tax grab and it needs to be highlighted as a real cost.”
Harry Katz, consultant at HA7 Consulting, complained there are very few cases where there is a genuine need to release money tied up in an annuity - a terminal illness, for instance - and agreed people will be unaware of hidden charges and the poor deal they are likely to get.
The government’s response suggested advisers are expected to benefit from an increased demand for their services because of the financial advice requirement for some annuity holders.
“However, there may be a requirement for advisers to take part in additional training or earn new qualifications to work with customers looking to sell their annuity,” it added.
Graeme Mitchell, managing director at Lowland Financial, condemned today’s statement from the government as yet another confusing piece of an already muddled piece of policy.
Other details contained in today’s statement were the market will be open to annuities purchased in the future, not just those already in force today, and that switching to a drawdown arrangement will be permitted, but selling only part of your annuity will not.
Andrew Tully, pensions technical director at Retirement Advantage, said on the face of it, giving people access to unwanted annuities sounds like a logical step in the pension freedoms. “But, and this is a big but, people might not receive the sort of cash they expect once you actually do the sums.
“While some people may find the idea attractive, those who have been sold a poor value annuity and then trade it in won’t necessarily get better value.”
He welcomed the compulsory advice safety net, but said it remains to be seen if advisers have the appetite to get involved in this business.
Adrian Walker, retirement planning manager at Old Mutual Wealth, said before rushing into a decision, it is important people remember the market for second hand annuities is likely to be one in which buyers hold all the information and sellers are in a relatively weak position.
Mr Tully went on to explain people will need to think about their current health and life expectancy, which will determine the value of the annuity to trade.
They should also consider the cost of the trade, as there will be significant costs for tax, administration, profits, and the cost of compulsory advice for notional annuity values of a value to be determined, but likely to be around £30,000 plus.
Yvonne Braun, director of long-term savings policy at the Association of British Insurers, added: “Getting the framework absolutely right to provide protection to consumers will be crucial if we are not to store up significant problems for the future, so providers and the ABI will continue to work hard with the FCA and government to achieve this.”
peter.walker@ft.com
