The government has begun consulting on the tax rules backing its creation of a secondary annuity market, on the expectation 300,000 people will take up the option to sell existing annuities from 2017.
Details have been released in a document published earlier today. Industry participants have until 15 June to get their views in to HM Revenue & Customs.
The consultation made little mention of the involvement of financial advice in the market - which earlier consultations have called for making compulsory - but the FCA is expected to shortly publish its own regulatory plans for how the interaction between buyers, sellers and intermediaries will operate.
Earlier this week, advisers reiterated the fact that many are shunning talks to develop this market over fears of future mis-selling claims.
Today’s consultation did reveal proceeds payable in respect of the surrender or assignment are intended to be the proceeds payable after any deductions for administration charges or payments made by the buyer or insurer to a financial adviser to meet the cost of advice provided by the adviser to the annuitant.
It also revealed rules to protect against abuse of the new annuity re-sale market.
These incldued the payment of proceeds will not be treated as an authorised payment where an annuity is assigned: to a person connected to the person giving up their rights; to a sponsoring employer, or a person connected to the sponsoring employer;· to a close company to which the seller is connected; or where the assignment or surrender of the annuity is part of a scheme of which the main object or one of the main objects is the avoidance of tax.
Its accompanying regulatory impact assessment indicates the expectation that 300,000 people will choose to take up the option to sell existing annuities in line with last year’s pension freedoms.
There are around six million annuities in payment, held by around five million retired investors.
As previously stated in the Budget, the Treasury expects a tax windfall of £960m in the first two years of the new market - April 2017 to April 2019 - although it also predicts a revenue loss in subsequent years, making net gain to the chancellor of £665m.
Tom McPhail, Hargreaves Lansdown’s head of retirement policy, said their research indicates a healthy appetite for this market, though that will in the end depend on what kind of price investors are offered in exchange for their annuity income.
“There are still unanswered questions around the regulation of the market and how consumer protection could work; we need to make sure investors don’t end up getting ripped off by their insurance company, for some of them possibly not for the first time.”
The government previously consulted in March 2015 on the proposed policy framework around the market, with a response published in December, including legislating the power given by the Bank of England and Financial Services Bill to define who will be required to take appropriate financial advice prior to selling.
The amendment will compel the Financial Conduct Authority to make rules requiring certain authorised entities to check that holders of a relevant annuity have received appropriate advice before they sell their annuity. Advisers and providers predicted another ‘insistent client’ problem in the works.
It is also intended that the transition from old to new product will broadly follow the current ‘like-for-like’ treatment of transferred annuities, therefore:
| Proceeds from the surrender or assignment of an annuity in payment that is... |
| A defined benefits scheme pension may only be paid to a flexi-access drawdown fund for the member or be used to purchase a lifetime annuity (that is a flexible annuity) for the member; |
| A dependants’ scheme pension may only be paid to a dependant’s flexi-access drawdown fund for the dependant or be used to purchase a new dependants’ annuity for the dependant; |
| A lifetime annuity may only be paid to a flexi-access drawdown fund for the member or used to purchase a new lifetime annuity (that is a flexible annuity) for the member; |
| A dependants’ annuity may only be paid to a dependant’s flex-access drawdown fund for the dependant or used to purchase a new dependants’ annuity for the dependant; |
| A nominees’ annuity may only be paid to a nominee’s flexi-access drawdown fund for the nominee or used to purchase a new nominees’ annuity for the nominee; |
| A successors’ annuity may only be paid to a successor’s flex-access drawdown fund for the successor or used to purchase a new successor’s annuity for the successor; and |
| A ‘pre-A Day’ annuity may only be paid to a flexi-access drawdown fund for the member or dependant or be used to purchase a lifetime annuity/ dependant’s annuity. |
peter.walker@ft.com
