Secondary annuity market
I do find it quite strange that the introduction of a new flagship pension policy is accompanied by such a negative atmosphere.
Just before Christmas we had the response to the consultation on setting up a secondary annuity market, and with it some muted enthusiasm.
Harriet Baldwin, Economic Secretary to the Treasury: “For most people sticking with an annuity is the right thing to do. But...”
Ros Altmann, Pension Minister: “For the vast majority of customers selling an annuity will not be the best decision. However...”
We are still a long way from the market commencing - April 2017 being the launch date - but so far I have seen very little positive interest or even demand for such a facility.
Some of the key issues will provoke discussion, even argument. Let’s just look at a few of the pressure points:
- Pricing - not just how such products will be priced but how parties to the transaction will understand the pricing process and what is or is not a good deal.
- Annuities of a certain size will require financial advice (the actual threshold has yet to be confirmed). We have been through this with pension freedoms and as yet I am not sure we have come to a satisfactory conclusion - the advice will have to be paid for!
- To be able to offer advice in this market there has been the suggestion that advisers will need to obtain an additional qualification.
- For those that do not need advice then Pension Wise will be the fall back.
- There will be the ability to sell back to the ceding provider.
- Reforms are permissive, so providers will not be forced to participate.
- People in receipt of means-tested benefits will also be allowed to participate even if there is an effect on their benefits.
What about the demand side – why would you want to sell an annuity?
- To get a better one? Although I’m not sure that would work!
- You did not need it but had to buy it? I can see perhaps a small market here where individuals who wanted to access flexible drawdown in 2011 and had to buy an MIR for the privilege – normally £20,000 p.a. (£12,000 for a few) - can now sell the unwanted plan.
- You do not need secure income and would prefer the cash. A lot might say this and for some with trivial annuities it might be the case but this is the crux of the whole pension freedoms issue – cash to spend or pass on or as an income for life?
As we have see over the last few years, behavioural science is playing a bigger and bigger role in our industry and for many people cash will be king. Some will never have had such a lump sum before and, as we know, we all underestimate how long we will live. The sale of the annuity will be in some terms ‘irrational’ but to the seller entirely justified. The question then might be, at what cost?
It will be interesting to see how many people who do sell an annuity then choose to reinvest into another pension contract – this behaviour can to some extent be controlled by tax but one important issue will be the maintenance of an open market option of available alternative contracts.
So here we are potentially spending a lot of time and effort on something that very few people appear to be actively seeking, with the warning that it might not work and the industry might not be able to price attractively.
If it is shown that the annuity was not good value in the first place, will the original decision to buy become subject to retrospective action?
A final thought - I have heard that there are already calls for the ability to be able to ‘cash in’ defined benefit pension schemes so they too can benefit from the pension freedoms. If that happens, roll forward a few years and everyone will have cashed in everything and we could all start again!
Anyone for a pension ISA?