The more I think about the proposed secondary annuity market, the more pessimistic I become of its viability.
You have to admire the sentiment behind the proposal. Those with existing annuities would be given the option to sell on the second hand annuity market.
The individual could then take the lump sum payment and take full advantage of the pension freedoms and invest it in a number of alternative retirement income products.
Currently, those who have annuitised are effectively locked into that choice through a tax charge which could be as high as 70 per cent.
As well as providing a escape route for pensioners trapped in unwanted contracts, a second hand annuity market could also provide a new source of income for providers who have seen a slump in annuity sales in recent times following the announcement of the pension reforms.
Securing the best value for annuitants remains a key concern.
The market would require many players to be effective - more competition would lead to better deals for customers.
Under the proposal, the original annuity agreement will remain, with the provider continuing to pay the annuity to the buyer for the duration of the annuity holder’s life.
However, the government initially proposed a restriction preventing the original annuity provider from buying it back because they could be subjected to significant pressure from the public to do so, it would prevent consumers shopping around to find the best deal.
However a ‘buy back’ could be advantageous for both the provider and customer.
The provider would already hold significant information on the customer so they would drive the administrative costs down. The savings could in turn be trickled down to the annuitant.
Given the severity of the risks involved in selling an income, the delay in the creation of the secondary market from April 2016 to 2017 is unsurprising.
Further plans to introduce the market for second-hand annuities will be set out this autumn.
In my view, an annuity will continue to be the best option for the vast majority of people because of the security element of receiving guaranteed income for life.
