Pension experts have picked apart the latest consultation paper aimed at developing the government’s promised secondary annuity market, revealing several questions yet to be answered.
From April 2017, existing annuity holders will have the option of selling or ‘assigning’ future income installments to certain third party firms, in return for a cash lump sum or an investment into a flexible drawdown policy.
Today, HM Revenue & Customs set out its proposals on how rules will be changed to allow such a market to develop, as at present, anyone selling on their annuity installments would be subject to a tax penalty.
Steven Cameron, pensions director at Aegon, said a surprise new development was those receiving annuities to cover their pension from a trust-based scheme may now qualify.
“Sometimes, trustees of workplace pensions have arranged for an insurance company to pay the scheme pension through an annuity. Here, the annuity may still be legally owned by the scheme, but HMRC will allow the trustees to make changes to offer these members the right to sell their annuity.”
This is set to open the secondary annuity market to more individuals than previously expected, according to Mr Cameron, who said most surprising of all was that even those in defined benefit schemes - where the trustees have arranged for annuities to cover pensions - could become eligible.
“In addition, some individuals may have a ‘deferred annuity’ which is due to come into payment from their future retirement age. Those aged 55 and above will also be able to sell these in return for a lump sum or payment into a flexible drawdown plan.”
But Jon Greer, pensions technical manager at Old Mutual Wealth, said the secondary annuity market is doomed unless the government finds a solution to one fundamental point.
“There is nothing in the document released today that deals with the death of the original annuity holder and how the insurer will ever know. This is key as the insurer will need to know how long to pay the annuity for where it has been assigned/bought.
“This situation is exacerbated if the annuity has dependants pension too. How will the insurer know if the beneficiary has died and who is responsible for keeping track. Even if a solution is found, this will be a real headache for insurers to administer.”
Talbot and Muir’s head of pensions technical Claire Trott, added the biggest issue will be establishing a market for something that will really only be viable short term.
“If the market is established it is key the annuitants take advice or we would again be seeing poor outcomes somewhere down the line. To this end is it good to see that there is scope for advisers to be paid from the proceeds of the annuity.”
Almary Green managing director Carl Lamb said that his firm will be going nowhere near this market, much like its avoidance of pension transfer ‘insistent clients’.