Advisers are shunning talks to develop an annuity re-sale market over fears of future mis-selling claims, in what could be a fatal blow to government plans to extend pension freedoms.
Reforms unveiled in December will allow people drawing annuities to sell their contracts from 6 April 2017, extending pension changes announced in the Budget two years ago.
More than five million people will be eligible from next April, with millions more to come as the reforms will also be open to those buying an annuity in the future.
Under current proposals, to sell on annuities worth above an as yet unannounced threshold, retirees will be required to seek independent financial advice.
A number of pension providers are in talks about setting up brokerages.
But Andrew Tully, pensions technical director at Retirement Advantage - one provider in talks to develop ‘annuity bureau’ marketplaces for people to sell on their annuities - said early signs show advisers shunning what they see as a big professional risk.
“We’ve spoken to a bunch and probably the majority of advisers are indicating that they don’t want to get involved,” he said.
The reluctance stemmed from fear of advising people to sell guaranteed incomes in retirement, who may later regret the decision and claim damages, he said.
“It’s a higher risk market - a bit like a defined benefit transfer - where the consumer is giving up a guaranteed income for a lump sum.”
If the government can not persuade advisers to get involved in the second-hand annuity market if will fail a key part of the “comprehensive consumer protection package” announced with the reforms.
It is asking the Financial Conduct Authority to put in place a consumer protection framework which could include risk warnings and ways for consumers to understand the fair value of their annuities.
A consultation paper on the second-hand annuity market is due from the FCA this week.
As advisers shy away from involvement in the changes, product providers are busy stepping into the gap.
Mr Tully confirmed he was talking to a number of different industry players about how to create annuity bureaux with intermediaries.
But so far these would seemingly only act as brokers for individuals looking to auction off their retirement income products, and not advise on the sales.
Aviva is rumoured to also be in talks on the matter, although it would not confirm this.
John Lawson, head of retirement solutions and policy at Aviva, said in the provider-led bureaux see themselves as a “natural home” for the secondary annuity market, “which seems sensible, as they were key players in the primary market; a lot of which was unadvised”.
He suggested provider-backed annuity bureaux would “streamline” the buying, selling and, where above the threshold, the advice process, in a way average adviser firms could not.
“[Annuity bureaux] can cut the costs of doing business, so it is going to have to be an advised process, but if they can do it by telephone in a fairly streamlined process then should cut the costs.
“With a more industrialised process is you can control it from the centre, so if you’ve got more regulatory control your compliance department can decide how those calls go, how the discussion with the customer goes and that’s got big advantages from a PI point of view,” he said.
Advisers may be reluctant to get involved in such a complex market where they only transact secondary annuity business two or three times a year, Mr Lawson added.
Stephen Lowe, group communications director at Just Retirement, confirmed his firm was involved in talks with companies around the idea of setting up brokerages.
He said it would be in the bureaux’s interest to signpost people to take advice.
“No provider wants to put their own brand at risk,” he said, adding JRP Group would not be interested in participating in a market that was not open and transparent.
At the end of March, FTAdviser revealed a further three consultations on the secondary annuity market are planned by HM Treasury and the FCA over the coming months.
Daren O’Brien, director at London-based Aurora Financial Solutions said this is an area his firm will not be advising on until it matures and the ‘known unknowns’ become more visible and get ironed out.
“This second hand market will need these retired clients to know exactly what they are doing and agree to give up their current guaranteed income, which raises massive compliance issues and there will be cases investigated by the Financial Ombudsman Service at some point in the future.
“With the Financial Ombudsman Service charging advisers fees of circa £500 per investigation, I don’t expect our fees to the client will be cheap should we decide to enter this market at a much later date.”
Colin Rodger, director at Glasgow and Edinburgh-based Alexander Sloan Financial Planning said: “I think as a business we will have to carefully consider whether this is a market we want to be involved with.
“For the number of likely cases it could be too high a risk area. It reminds me of the second hand endowment policy market which was equally difficult to advise on. It may be best left to the annuity bureaux with more resources to deal with it.”
ruth.gillbe@ft.com
