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Barriers to annuity-for-cash plans

This article is part of
Key Adviser Issues in Budget 2015

A paper was published alongside the Budget that pledged to push ahead with creating an annuity re-sale market.

The government’s desire to push ahead is understandable: more than 5m legacy savers, probably not content with their existing income stream, could be keen to have a cashing out option. The concept of freedom also lends itself to offering an open market solution.

However, experts picking through the content of the paper found it produced more hurdles than solutions as to how this market would operate.

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The basics

The consultation paper stated the government, if re-elected, will legislate that from April 2016 to allow people who are already receiving income from an annuity to agree with their annuity provider to assign their income to a third party for a lump sum or an alternative product.

A 55 per cent tax which would currently apply will be removed in favour of the marginal rate taxes applied to other savers when access their pension flexibility from next month.

It is worth noting the right to assign will not be extended to those receiving a pension from an occupational scheme and experts warned the difference between this and having an annuity may not be clear to all.

Also, a key piece of phrasing in the draft rules states the existing provider will need to agree to re-assign the income, essentially allowing firms to block re-sales. Aviva, Scottish Widows and Phoenix were named in a Sunday Times article as unable to confirm they would agree.

Advice need

In the 35-page consultation paper the government admits safeguards will be required to stop annuitants losing out once they are allowed to sell on their policy.

The paper argues there is a strong case for requiring annuity holders to take financial advice from an independent financial adviser prior to making the decision to sell, with a requirement for annuity providers to check this before they enable the annuity to be assigned.

This mirrors the requirements now in place for when people convert from a defined benefit to a defined contribution based pension during their accumulation phase, where the value of the pension is above £30,000.

The paper states: “Regulated advice would ensure that individuals receive help tailored to their circumstances and a recommendation on whether assigning their annuity to a third party would be in their best interests.”

It says people would still be at liberty to choose not to accept a recommendation. It also notes regulated advice “can be expensive, as individuals could have to pay several hundred pounds or more, which might be a significant proportion of the value of their annuity”.

However, the government argues following on from the FCA’s recent clarification of rules around simplified advice and new business models for online and telephone advice, there are new, expanded opportunities for the advice sector to meet the growing demand.