Concerns mount over secondary annuities market
Six months away from the launch of the market for annuity resales, concerns are mounting that there may not actually be a market, because insurers are shying away from involvement.
April 2017 is set as the date when retirees who bought an annuity with their pension fund will be able to put it up for sale in return for a cash lump sum.
For any market to function properly there needs to be willing sellers and buyers, but there is little indication that there will be enough insurance companies offering to buy back annuities.
So far there has been little take-up of the idea by providers. Investment broker Hargreaves Lansdown has said it does not plan to allow customers to resell annuities through its platform. We spoke with ten providers and found that most of them have ruled out participating or are still undecided. See the table below:
Outlook bleak for annuity resales
|Provider||Will buy back own annuities||Will buy annuities of other providers|
|Just Retirement||Yes (under 3 conditions)||Yes (under 3 conditions)|
|Fidelity Personal Investing||No||No|
|LV=||Yes (depending on further details)||No|
|Key Retirement||No response||No response|
Source: Money Observer
Prior to the introduction of pension freedoms in April 2015, the system was very inflexible: most people in defined contribution schemes had to use their pension pot to buy an annuity to fund their retirement.
For those who wanted to take money out of their pension scheme, the law required that they used it to secure an income, and there was no option of taking out cash tax-free without securing an income.
Moreover, annuity rates have fallen dramatically over the past two decades, making investment-based alternatives a more attractive (though less secure) way of generating an income for many people.
The secondary annuities market was proposed as a means of helping those who never wanted to buy an annuity in the first place.
But while the launch date is nearing fast, many questions remain unanswered around consumer protection, and providers aren’t keen, or ready, to take on that obligation. As AJ Bell’s Tom Selby points out, “there remains a real risk that someone who has been ripped off when buying an annuity will be ripped off again when they sell it”.
Tighter regulation and the advent of the pension freedoms should mean fewer people are being ripped off today, says Selby, so the number of savers wanting to trade in their policy will also inevitably drop off. It’s therefore highly debatable whether a sustainable market will develop in such an environment.
“Furthermore, the prospective buyers have yet to show themselves, while advisers I have spoken to have no intention of facilitating this business given the risk of future Ombudsman claims, particularly in relation to insistent clients,” Selby adds.
A step too far
Aviva is one of the providers who are yet undecided. John Lawson, head of retirement policy, says there is a lot the government needs to finalise first.
In terms of consumer protection, he suggests that speaking to Pension Wise should be made compulsory for consumers. There are issues around annuities for joint partners as well - what happens to the partner of a person who sold his or her annuity?
In addition, there needs to be a basic system in place to establish whether people are still alive, because an annuity will be paid out depending on the life span of the original buyer.
At the moment, insurers don’t have the right to get that information from banks, for example, which would know if a person passed away because their account would be closed. Lawson says Aviva will not be able to say what role it will play before the end of this year at the earliest.
In some ways, the secondary annuities market turns everything people know about annuities upside down, argues retirement expert Billy Burrows.
When people were sold annuities they were told to declare all their health issues in order to get the highest income but when they come to sell annuities the best deals will be for those who are fit and healthy.
“Whilst I fully support freedom and choice, I think the secondary annuity market is a step too far,” says Burrows.
He says that a market, where a small number of household names may eventually buy back the annuities they sold in the first place, might materialise; but few companies will offer to buy back annuities on the open market.
But “unless action is taken, the secondary annuity market will not meet the expectations of customers and the government and the industry will end up with egg on its face.”
This story was originally written for our sister magazine, Money Observer.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
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.