PensionsNov 25 2015

Secondary annuity market

Search supported by
Secondary annuity market

The pension freedoms may now be in action, but for many, their money is already locked away in an annuity unable to be touched. As yet, there is no system allowing people to exit from their pre-existing arrangements. But the government has announced that it believes there is no reason to prevent retirees who have already purchased an annuity from having the ability to sell their right to future income streams for an upfront cash sum if it suits them.

The consultation to do so was launched in George Osborne’s March Budget this year. The government subsequently backtracked a few months later in the first Conservative Budget in July and has further delayed plans for the market to come into force until 2017. Plans for the market will be set out in the autumn, and the government has agreed with initial respondents to the consultation that implementation should be delayed until 2017 to ensure there is an “in-depth package to support consumers” in making their decision.

Whether or not the market will actually come into action in 2017 is yet to be revealed. But views on the market remain mixed, perhaps because we are still more than a year away from any potential changes.

Claire Trott, director and head of pensions technical at Talbot and Muir, is surprised the secondary annuity market is still a possibility. “I think it’s failing before it’s starting,” she says. “It is going to be a very small market.”

Many potential sellers would likely be losing out and it may not be worth selling an annuity. When an annuity is bought, the calculations and fees are taken upfront. However, Ms Trott points to the fact that if you are in worse health than when you bought it, the buying price would be based on your life expectancy from that moment. “People will be losing out a lot.”

Andrew Pennie, marketing director at retirement planning specialists Intelligent Pensions, says the practicalities of the market are “horrendous”. “It requires a huge administrative burden to get it to work, and who wants to be involved in it when there’s so much else going on? I think one of the biggest issues is that if it does happen, it has to be underwritten. That would add more complexity and then there has to be a cost to that, so when it comes to setting up the whole administration process and making it happen, it will come at a healthy cost, which will then be passed onto a client who won’t get as good value for their annuity,” he explains.

He adds it is an easy option for politicians to announce because it sounds great. “But people who have annuities will now think they’re rubbish because that is what is being reported in the papers, so they think this could be a chance for them to get out of the annuity and get some cash. People like that idea. But the reality of it is, nobody knows what it will look like. Unfortunately it’s likely to be the most desperate who look to take the cash and end up short of cash later on in life.”

Mr Pennie believes that what needs to be done is to help people engage in pre-retirement to get onto the right path. “As an industry, we have got to be less obsessed with at-retirement.”

Staying open-minded

John Lawson, head of policy at Aviva, is approaching the market with an open mind. The government is keen on the secondary annuity market, and Mr Lawson believes George Osborne will be keen to press ahead so it will eventually happen, probably by 2017.

“It is too early to say if we will be involved at all. It depends on what demand looks like. There are lots of other potentially attractive markets out there that don’t have enough volume or demand to justify entering this market,” he adds.

He says Aviva would have to have a partner to underwrite and change legal ownership of the annuity. One feature he says could be interesting is the talk of a blind bid portal. This would mean buyers would bid for the annuity but not see any other bids. Mr Lawson believes this would encourage offering the highest bids – and it could help sellers get the right value for their annuity rather than an open competition.

“The infrastructure would have to be built for this and other providers would have to enter the market. If it amounts to a few hundred [sellers] then it’s not sufficient to drive the market.”

Mark Stopard, head of product development at Partnership, says he is very positive about the market. “It would be a very good thing if we could find a way to establish it and work well for all parties involved and their customers. It would help a lot of customers who have been caught out by arbitrary pension freedoms, and I think it would help annuity holders in general – future annuity holders too.”

“It would allow more people who want security to purchase them with confidence. We are interested in being a buyer and a packager. But the only way the market can work is if individuals are underwritten.”

“Anybody who wanted to sell their annuity for any reason other than the fact they’re really ill would get a bad deal. For that reason, the market would have to be underwritten. This is where it would add better value than competition.”

A major issue within this area is whether or not advisers will be comfortable with allowing a client to sell their annuity. “I can’t see in most cases how an adviser would say it is good value to cash in an annuity. There could be another insistent client issue,” Ms Trott says.

‘I want my money’

Regardless of whether or not people should be cashing in on their annuity, there will undoubtedly be a proportion of people who will want the money no matter what an adviser says.

Ms Trott says the Treasury will have to bring in some sort of forced advice, similar to cashing in a DB scheme. She adds, “It will have to be regulated, or else there are more problems on top of other problems, such as people taking annuities without advice but who bought the wrong annuity. There are some people who should not have had it in the first place. If there is no advice about getting out of the annuity, then people will be in a worse position.”

Interest levels in the market are yet to be discovered. Mr Lawson says that since April, thanks to mentions in the media among other elements, there have been some people who have shown an interest, but the numbers are not substantial. “I would think the government is going to develop the market. There will be other entrants but we’ll decide near the time. The government wants it to develop but the necessary infrastructure will be put in place.” However, he adds, the initial entrants into the buying market may not be household names to begin with.

Mr Lawson agrees that regulation is necessary when it comes to this area. “The buyer should be regulated. Not everyone should be able to buy. Within a blind portal, the customer would get the best value and the intermediary would be less biased.”

“Financial advice would be appropriate rather than doing it on their own. Annuities with smaller pots might mean people make mistakes. The damage would be much less with advice,” he adds.

Whether or not the secondary annuity market will actually happen is one argument. But if it does, a lot will need to be done in a short amount of time. A lot can be learnt from this year’s pension freedoms and the speed with which they were ushered in. More infrastructure will have to be built properly and advisers will need to be prepared for insistent clients. Will the market be ready to cope with demand and be able to avoid yet another ‘mis-selling scandal’? That is the real question.