‘Buy-backs’
Elsewhere the consultation also seemed to rule out annuity buy-backs by the original insurer, which it is feared could be a source of detriment and could undermine the competitive market that the reforms hope to create.
The government believes that the risks of allowing ‘buy-back’, effectively terminating the contract, outweigh the benefits, but added it “welcomes views on the potential risks and benefits of allowing ‘buy back’”.
According to the paper produced by HM Treasury, allowing annuity providers to ‘buy-back’ their annuity could also result in some consumers falsely believing that they can only use these new freedoms through their existing annuity provider.
Martin Tilley, director of technical services at Dentons Pension Management, questions who would want to buy. He says purchasers of annuity contracts other than pension schemes will face tax implications on future annuity receipts meaning the income stream they will receive will be far less attractive.
Mark Stopard of Partnership also told FTAdviser this option could be vital if the market is to work for smaller pot savers, as the tax implications could make this income stream unattractive for third parties but still valuable to the original insurer, which is effectively writing off a liability.
Who will buy?
The need to undertake health assessments on each individual to enable underwriting, coupled with the costs of administration, it is likely the cash lump sum price for a given annuity will be significantly less than the original purchase price, less any payments that have been made to date.
Many have predicted discounts will be applied of around 20 per cent; some have even claimed these could be higher.
Mr Tilley says such concerns, coupled with the lack of index-linking on most policies which brings additional future liabilities, mean one of only a few likely buyers might be pension funds.
He says: “So the question is, who is going to be in the market to buy these schemes? In reality, very few, which will mean the market may not be as competitive as the government hopes and those that are, will be buying on their terms, which will be slanted in their favour.”
Mr Tilley adds IFAs will probably not want to provide advice on annuity re-sale, as specialist knowledge would be required and the likelihood of a positive recommendation “must be slim.”
Steven Cameron, regulatory strategy director at Aegon, says: “We fully expect individual underwriting to be required because buyers won’t be able to offer a price without information on the individual’s life expectancy.
“This makes providing benchmark selling prices or shopping around before you sell problematic – each prospective purchaser might demand their own medical evidence. For joint life annuities, both partners may need to provide medical evidence.”
