Insurers may block annuity sales
As the government publishes more details of its plans to create a secondary market for annuities from April 2017, frustrated policyholders are being warned that some insurance companies may not allow them to sell up.
Plans to allow annuity holders to sell their retirement income for a cash lump sum were first announced in the 2015 Budget in order to give people that have already retired the same choices as those retiring after the pension freedoms were introduced in April 2015.
- HMRC has estimated that some 300,000 annuity holders will sell their plans in the first two years of the scheme, giving the revenue a tax windfall of £960m.
However, while the new rules will permit the trades to take place, there is currently no legal obligation in place that forces the insurance company that sold the plan in the first place to agree to the transaction.
Andrew Tully, pensions technical director for Retirement Advantage says: “It is down to the discretion of the individual annuity provider as to whether or not it agrees to redirect the income.”
Mr Tully adds that while Retirement Advantage will allow its policyholders to sell their plans “subject to checks”, some providers may not play ball. “It will be a bigger issue for bigger insurers with a large back book of older annuities.”
Insurers will have to balance the administrative burden of selling policies with the reputational problems that may be caused if they don’t enter the market.
Jon Greer, pensions technical expert at Old Mutual Wealth says the scheme could be “a real headache for insurers to administer.”
He says: “From a purely practical point of view, this whole plan is doomed unless the government finds a solution to a fundamental point. There is nothing in the document [released by HMRC on 20 April] 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.”
Lump sums could be worth much less than the original annuity
The regulator, the Financial Conduct Authority, has also issued a consultation examining how consumers can best be protected. The government’s free guidance services are likely to be expanded to include annuity sales, while policyholders with annuity incomes in excess of a yet unspecified threshold will be required to pay for financial advice before they can sell up.
However while consumer protection will undoubtedly be necessary, experts are worried about how easy it will be to provide with mis-selling and compliance issues weighing heavy on advisers’ minds. Mr Tully says: “The advisers we have spoken to don’t want to touch it. They don’t think it is appropriate in most instances for people to sell their annuity income.”
This is because, after charges and tax, the lump sums they receive could be worth much less than the income they currently receive.
The example below from Retirement Advantage shows what impact these costs could have on the sums policyholders receive when they come to sell their annuities:
Morag, age 60, purchased her annuity in April 2013 with a life expectancy of 17 years due to high cholesterol and high blood pressure. She received an enhanced annuity rate of 6.8% on a pension worth £56,000 (£3,808 a year).
Unfortunately, since April 2013, Morag’s health has deteriorated and her life expectancy is now likely to be nearer 13 years. Her other secure income is valued at £10,000 a year.
Notional income remaining (based on new
underwriting information - 13 years of £3,808
(admin / health checks / advice fee / profit)
Income tax on pot remaining of £41,504 (effective
rate of 24%)
Source: Retirement Advantage April 2016.
An unexpected one-off financial gain in cash or shares, generally when mutual building societies convert to stock market-quoted banks. Also windfall tax, a one-off tax imposed by government. The UK government applied such a measure in the Budget of July 1997 on the profits of privatised utilities companies.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
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.