IFS report raises ‘serious issues’ about annuity sales

IFS report raises ‘serious issues’ about annuity sales

Annuity holders hoping to take part in a potential secondary market will need good quality financial advice, research by the Institute for Fiscal Studies has said.

The study by IFS programme director for pensions Gemma Tetlow, concluded that a significant minority of annuity holders could struggle with the complex decisions required in valuing their annuity compared to an alternative lump sum.

The research went on to raise concerns about the issue of “adverse selection” where potential annuity buyers assume those looking to sell will probably die soon and so offer small lump sums, acting as a disincentive for people to sell.

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It said: “There is a significant risk that the secondary market for annuities will be limited or fail to emerge at all due to the potentially significant problems of adverse selection in this market.

“A more serious issue could arise from individuals’ potential inability to make well-informed decisions about whether or not to sell their annuity.

“Individuals must have access to good quality financial advice and guidance to navigate this new market.”

One of the reasons for the animosity towards annuities is their perceived poor value for money, but Ms Tetlow pointed out that if the market for selling annuities had been perceived not to work well, it was “far from clear” why a market for buying them back should work better.

Given that women live longer than men, potential rules against offering prices for an annuity which vary by sex could also make the secondary market particularly unattractive for women, the report added.

A consultation on the proposals is currently taking place, with a potential secondary market coming into effect in April 2016.

Estimated value of DC annuities in payment
Costs/age25th percentileMedian75th percentile
All, 55+£10,665£25,854£61,766

Source: Institute for Fiscal Studies

Adviser view

Mel Kenny, an adviser with London-based Radcliffe and Newlands, said: “The people who will most want to sell are those who took an annuity in good health and are now in poor health and want the lump sum.

“But they will not find many buyers for an annuity that will not pay out for very long.”