Millions given freedom over their pension as government outlines new secondary annuity market

by Alexander Beard, on Dec 17, 2015 2:27:54 PM

This summarises the UK Government’s proposal to allow people in receipt of an annuity in payment to exchange income for capital…..

We have summarised what we believe to be the main challenges of this proposed change at the end of the note and would be happy to address any questions that you may have.

From 6 April 2017 more than five million people will be able to sell their annuity.

Plans to grow a new secondary annuity market have been set out by the Economic Secretary to the Treasury Harriett Baldwin, as the government outlines plans to extend its landmark pension freedoms and create a new secondary annuity market.

These changes will give people the freedom to use that capital as they want – just as those who reach retirement with a pension pot can do under the pension freedoms introduced in April. Under the new changes retirees will be able to take the annuity as a lump sum, or place it into drawdown to use the proceeds more gradually.

The Economic Secretary also set out further details on how the new secondary annuity market will work, including:

  • setting out that pension annuities belonging to an individual and held in their own name will be eligible for the new freedoms
  • requiring that all UK-based annuity purchasers and intermediaries are regulated by the FCA
  • allowing annuity providers the choice to buy back an annuity, subject to robust safeguards
  • introducing a comprehensive consumer protection package to ensure people make informed decisions about their savings, including:
  • extending the free and impartial Pension Wise service to cover the secondary annuity market
  • requiring individuals to seek independent financial advice for annuities worth above a certain threshold
  • asking the independent regulator, the FCA, to put in place a consumer protection framework which could include consulting on a range of extra consumer protections, such as risk warnings and ways for consumers to understand the fair value of their annuities

For most people, sticking with an annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose - the same freedom people approaching retirement were given in April this year.

Keeping an annuity will still be the right decision for the majority of people. But some were forced to buy annuities in the past that may not have been suitable for them.

For the vast majority of customers, selling an annuity will not be the best decision. However, individuals may want to sell an annuity for instance to provide a lump sum for relatives or dependants; in response to a change in circumstances; or to purchase a more flexible pension income product instead.

Further information

  • currently people wanting to sell their annuity income to a willing buyer face a 55% tax charge, or up to 70% in some cases. The government will remove this charge, so people are taxed only at their marginal rate
  • Whilst fully recognising the contractual agreements between the annuity holder and the annuity provider, this new option does not unwind those contracts. Instead these changes will allow the annuity-holder to access the value of their annuity where they can find a willing third party buyer. The annuity provider would continue to pay the annuity payments for the lifetime of the annuity holder, but would reassign those payments to the purchaser
  • Annuities owned by an individual and held in their own name (rather than by a pension scheme) can be sold from April 2017. The government has confirmed today that this includes joint annuities and annuities with a guaranteed rate. Existing annuities and annuities purchased in the future will all be in scope

Requirement to seek financial advice

  • through changes to the Bank of England and Financial Services Bill 2016, the Government will require people accessing larger pots to seek financial advice, ensuring that they know what their options are and receive a tailored recommendation
  • this legislation will require the FCA to make rules to ensure that certain authorised firms check relevant annuity holders have sought appropriate financial advice before transferring or dealing with their pension annuity payment
  • what constitutes a relevant annuity and the threshold – including how it will be calculated and whether it should be set in relation to an individual’s financial circumstances – will be set subsequently by secondary legislation
  • the Bank of England and Financial Services Bill also expands Pension Wise, the government pension guidance service, so it can provide free and impartial guidance to anyone thinking of selling their annuities

ABG believes that the main risks of this are as follows:

  • Loss of guaranteed income.
  • Loss of spouse’s guaranteed income.
  • Loss of index linked income, should markets fall income could reduce
  • Risk of tax complications therefore unless client fully understands implications.
  • Reputational risk if this blows up at some point in the future

Bottom Line: No action should be considered without appropriate qualified advice