Returns people receive when selling their annuities will on average be 25 per cent less than the expected value of a 10-year old annuity, warned Portal Financial.
There is also likely to be a significant knock-on effect to newly purchased annuities, which could further weaken their value, the at-retirement specialist argued.
Across the last decade, the average private pension pot used to buy an annuity has risen from around £22,000 to £42,000.
Portal Financial said that people selling annuities will lose value in four main ways, based on an average current annuity of £42,000.
Portal Financial estimates the mandatory financial advice charge as announced by the government was £500 to £1,200, while the second-hand annuity broker exchange charge may be between £1,500 and £2,600.
The third way that retirees will lose value is the 6 per cent to 10 per cent return that the buyer would be looking for from any purchase - between £2,500 and £4,200.
Finally the potential administration charge levied by the annuity provider for costs associated with administration is likely to be between £250 and £1,000.
Jamie Smith-Thompson, managing director of Portal Financial, said any requirement for medical information prior to the sale could also severely limit what a broker might pay, or even make the policy worthless, as the long-term value of the policy could be impacted if the policyholder’s life expectancy was reduced.
Mr Smith-Thompson also pointed out that as the life insured, including joint lives, no longer have a pecuniary interest in the policy, they will have little interest in notifying the insured of a change in circumstances or, ultimately, death.
As such, he warned insurers may make payments that are not due.
Alongside this, because the policy may be resold several times, the ultimate owner may be based outside of the UK, adding to provider costs.
Portal noted that there are added costs associated with fraud and anti-money laundering issues where a potential buyer is based outside of the UK.
Mr Smith-Thompson said: “Creating a secondary market for annuitants wishing to sell their policy has potential advantages for some customers but, as the ultimate financial return that a policyholder will receive is likely to be significantly less than what the policy may have paid out over the full term, it requires careful consideration.”
Carl Lamb, managing director at Norwich-based Almary Green, said that his firm has no intention of getting involved in the market.
He said: “Why would people give up income (even more so if they have guaranteed annuity rates) for a heavily discounted value with charges and fees on top. It makes no sense whatsoever and what about guaranteed periods and spouses income if built in?”
Douglas Anderson, a partner at actuarial consultancy Hymans Robertson, explained that the market would have similarities to the old endowment policy secondary market, but with much more complexity.
“The insurer providing the annuity would provide an annuity surrender value, but a secondary market will exist where third parties, for example, other insurers and pension schemes, will compete to buy specific policies.
“The big difference between an annuity and an endowment policy is that the health of the individual has a considerable impact on the value of the annuity,” he continued, giving the example of a 70-year person with a terminal illness having substantially less annuity value than the same annuity for a healthy individual.
“To allow for this, the market for annuity purchase will need to factor-in underwriting costs.”
ruth.gillbe@ft.com
