Insurers urge government not to rush secondhand annuity market
The Association of British Insurers is calling on the government not to rush through its introduction of a secondhand annuity market that will allow policyholders to sell their existing annuity for cash.
In its response to the government's consultation, the ABI said it supported the proposals in principle but stressed that the process should not be hurried through, given the sizeable challenges in creating a market that both functions well and provides appropriate protection for consumers.
Among the ABI's biggest concerns are how the rights of dependents and beneficiaries would be protected and how people would be safeguarded from fraud and scams.
Dr Yvonne Braun, director of long-term savings strategy at the ABI, said: "Naturally there are considerable challenges in establishing a functioning market, and many unresolved complex legal, regulatory and prudential questions."
"We want to work with government to help resolve these issues, but given the lessons learned from the Freedom and Choice reforms and the need for clarity in many areas, we urge the Government not to rush these proposals through for 2016. Allowing more time will ensure an appropriate regulatory regime can be developed to give this new market a chance to succeed."
Chancellor George Osborne announced in the March Budget that the pensions freedoms should be extended to people who have already purchased an annuity and proposed that, following a consultation period with the industry, a market should be created that would enable existing policyholders to sell their guaranteed income for a cash lump sum.
Insurers will not be expected to buy back policies; rather investors - most likely institutional - would be given the opportunity to buy them.
While the move might appear to appease retirees who purchased their policy ahead of the reforms, experts are warning that they may not get as much cash back as they would like. This is because potential investors would want to make a profit and request further health checks on policyholders to get a clearer picture of how long they can expect the income stream they are purchasing to be paid.
As such Portal Financial has estimated policyholders can only expect to get 60-70% of their plan's true value back in cash. Cash would also be payable on the lump sum, reducing it further.
Following the Budget, Tom McPhail, head of pensions research at Hargreaves Lansdown, even questioned whether the scheme would get off the ground at all.
"It is far from certain that this scheme can ever be developed at all, much less that it can raise this kind of revenue for the Treasury without exposing hundreds of thousands of retired investors to a misselling risk," he said.
"It is widely acknowledged that even if the consultation produces a workable model, it will require robust and potentially expensive safeguards to ensure that investors get a fair price in exchange for their annuity. For 13 years the Treasury and the Department of Work and Pensions have tried and failed to create a shopping around system which serves investors well when they first buy an annuity; it is quite a leap of faith to expect them to achieve this now in the space of just one year for a market which doesn't even exist yet."
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.