Pensions  

Webb’s big idea is unworkable

Webb’s big idea is unworkable

You cannot afford to blink these days for fear of missing the next development in the annuity market. The latest is the claim from Stephen Webb that he was not suggesting that existing annuities be unwound. Instead he was hoping that there would be a secondary market in annuities so that an annuitant could sell off an income stream to an insurance company or a pension fund.

Let us see what his proposal would mean in practice. Take a man aged 70 with an annuity of £250 a month gross. He would receive a smaller amount after basic-rate tax – say £200 a month. He wants to sell his annuity to raise cash.

Say Prudential is thinking of buying it. Their initial premise will be that the guy is not in good health because if he was super fit he would be foolish to give up the annuity. But how bad? Clearly he will have to be underwritten with a medical. That may cost, especially if there is history of illness or surgery – anything from £100-£500. Pru would not be too worried if he was not sound of body so long as they could reliably estimate what his prognosis was. But they would want to know if he was sound of mind. Why? Because there is a possibility that he would dissipate the cash raised and then, facing financial hardship, be tempted to top himself.

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Assuming that it was confident that with all this information it would be able to offer terms, there is no guarantee it would get the business. The annuitant might change his mind or go to another insurer. So the Pru would be reluctant to incur this cost. If the customer was keen he could pay for a full medical report which he would own and therefore could make it available to a number of insurers. It would be rather like the old home information packs sellers needed, which included a survey of the house.

Would that satisfy the Prudential? It would certainly make it easier for them, but they might still want more information. And much depends upon what doctors are prepared to disclose in such an open document. What else would the Prudential want once the medical issues are addressed?

Well, we must first ask what is it that the Pru is buying? It is buying the gross income stream of £250 a month. There is no income tax payable by the annuitant as he will no longer own the income. However, Prudential will acquire an income-generating asset and it will be subject to tax on the income. It will be part of the general assets of the company and not ring-fenced to belong to the pension business fund. That would kill the idea stone dead – it is the opposite of the Midas touch, it is the Sadim touch.

Even apart from that there are other issues. The income is payable so long as the original annuitant is alive. The original insurer will probably periodically obtain certificates of continued existence, but there is no incentive for the annuitant to complete them. So a stage would come when the original insurer could terminate payment even though the annuitant was still alive. Prudential would lose out.