In its response to the government consultation on creating a secondary annuity market, CAB stated that it both supports the principles behind the freedom and choice reforms and understand the logic in extending them to consumers who purchased an annuity before 6 April this year.
However, it stated that there are a number of risks to consumers associated with existing and proposed pension freedoms, many of which Pension Wise and the system of risk warnings address.
“These new proposals could create specific additional risks for consumers who have already purchased an annuity.
“One major distinction is that doing nothing will be the best option for many existing annuity holders, whereas new consumers starting the decumulation phase need to make an active choice.”
CAB explained that existing annuity holders face particular risks around means-tested benefits, as those with incomes around the level of pension credit may immediately see a drop in income as a result of selling their annuity.
“They are also at risk of getting poor value for money: buying a pension product for the second time round means consumers lose money twice through transaction costs,” the statement added.
It pointed out that there are other important distinctions between consumers who benefit from existing freedoms and those who would be eligible for these proposed new freedoms.
“They are likely to be older, which may for some heighten vulnerability to scammers and make it harder to make complicated investment choices; they are also less likely to be able to take paid work if they run out of savings.”
Finally, the CAB stated that there are also broader public policy risks that a large new cohort of extra consumers may want to start selling in a new market. “An extra 5m people eligible to sell their annuities represents a major potential increase in demand for a brand new market.”
The Treasury’s consultation into suggestions made during the last government’s tenure finished yesterday (18 June), with providers, consultants and industry bodies all bringing up concerns around the potential new policy, most bemoaning the potential expense and lack of value for customers.
The Tax Incentivised Savings Association has recommended the introduction of a statutory override and allowing existing annuity providers to ‘buy back’ annuities in its response to the consultation.
Jeffrey Mushens, Tisa technical director, said: “The creation of a secondary annuity market is a natural progression of the pension freedoms already introduced. We support it in principle and believe that the instinct to trust people with their own money is a good one.
“However, we feel that a statutory override is necessary in order to make the reforms available to as many consumers as possible. This approach would prevent these specific reforms from exacerbating the reported consumer frustration of being unable to access the already introduced freedom and choice at retirement, where some schemes have chosen not to allow them.
“Unlike the reforms introduced in April 2015, annuitants are unable to transfer to another provider and so would have no way of accessing these freedoms without a statutory override.”
He added that in order to encourage competition and consumer choice existing annuity providers should be allowed to ‘buy back’ annuities, that regulated advice should not be mandatory but that consumers should first receive relevant tailored guidance and that FSCS protection should remain in place for annuities that have been sold on.
peter.walker@ft.com
