Pensioners who bought an annuity will be given the freedom to sell it on from next year, under new government plans. But criticism is piling up, and it seems the new secondary marketplace will be a good idea for almost no-one – except the brokers who trade them.
The details are still being ironed out, but effectively the 5m people who used their pension savings to buy an annuity, or contract guaranteeing a regular income stream, will be able to sell it through a broker. They will get a lump sum in return, while the buyer will take on the annuity and receive the regular income under the contract’s original terms.
There are some positives. Giving people a get-out clause could make annuities more attractive, says Andy James of Towry.
“I think the change could add to the appeal of annuities, since one of the main drawbacks has always been that it is a ‘one and done’ decision. If there is now going to be a get-out clause, albeit at a cost I suspect, then it may encourage a few more people to take out an annuity in the first place, which will be no bad thing.”
Annuities have been criticised for giving people meagre income streams in relation to their retirement savings. At one point, a pension pot of £1m translated into an annuity which paid annual income of £20,000 in retirement.
They do have shortcomings, but annuities offer one shining attraction. That is the fact a person can know they will be paid a regular sum for as long as they live. As Ian Price of St James’s Place put it: “That’s a guaranteed income for life – that’s one hell of a guarantee.”
It’s also the reason that most people still opt for an annuity at retirement. It’s a safe, albeit imperfect, choice.
The new marketplace will likely require people with annuities worth a certain value to seek advice from a financial adviser before selling. It’s unclear under what circumstances a pensioner would be advised to surrender their reliable income. Perhaps if they only have tiny pay-outs from their annuity, or if they are very wealthy and can afford to give it up. “The advice is likely to be ‘stay put, retain what you have’,” says Frazer Wilson from Thomas Miller Investments.
Selling an annuity is a huge decision, and some warn of the potential for a new mis-selling scandal. “Regulatory certainty will be needed to minimise the potential for another mis-selling scandal or reputable firms will be deterred from entering the market,” says John Gaskell of accountancy body ICAEW.
A FAIR PRICE
Even if a professional suggests the sale should go ahead, for the sellers, the brute reality is they may get far less than they hoped for.
Sellers will be taxed on the proceeds. The government expects to take £1bn in tax over the first two years of the market’s operation – not bad for alleviating the deficit. Once tax, a broker’s fee, and the new valuation of the half-depleted annuity is taken into account, the final sum will dwindle.
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“When people look at the figures there’s likely to be disappointment. They will think that this doesn’t look like a particularly good deal,” Wilson adds.
WHAT’S THE VALUE?
The chief difficulty is in how to value an annuity that’s already been paying out to someone for years, or even decades.
When someone goes to buy an annuity at the point of retirement, how much they will get in regular payments depends on a host of factors. Actuaries take into account that person’s life expectancy, based on their age, gender, health and marital status. External factors such as interest rates are included too.
Selling an annuity could mean going through this complex valuation process again, and may also involve a medical examination.
“I suspect if someone wants to sell an annuity, people who buy them will go through the process of looking at the seller’s longevity. There will probably be a health assessment needed, which will put people off,” says Wilson.
“It will be difficult to establish a fair price,” adds Gaskell. Brokers which decide to value annuities and find buyers will want a fee for doing so, eating into the sale proceeds. “Whenever a commodity is sold, someone has to make money on the way. I’m not convinced anyone is going to come out and do this, and if they do, they will make a [profit] margin on it,” says Price.
It may mean the secondary market in annuities turns into a lucrative opportunity for the brokers and intermediaries, but not for the pensioners who are selling. “The advantage will lie with financial services firms, not consumers who want to sell,” says Gaskell.
Who would want to buy a half-used annuity? It probably won’t be other pensioners. People who have decided to go into drawdown with their pension savings, which is a way of staying invested while still taking an income, have the option of buying their own annuity.
“At the moment there’s a whole discussion in this area. I think it will probably be institutions or pension funds which want that income stream,” says Wilson.