Hargreaves Lansdown backs out of secondary annuity market
The UK’s largest annuity broker has confirmed that it will not launch a secondary annuity broking service, when the option to sell existing annuities becomes available next year.
From April 2017 any existing annuity holders will be able to sell their guaranteed income in return for a cash lump sum. The government has said this will give people who have already purchased annuities access to the pension freedoms introduced in April 2015 and enable them to manage their retirement finances as they wish. HMRC has predicted that 30,000 will sell their annuities.
However, following extensive research and analysis Hargreaves Lansdown has confirmed that it will not be entering the market due to fears that there will be insufficient protection for consumers.
“For many investors, it is likely to be a poor decision”
Commenting on the decision, Tom McPhail, head of retirement policy at Hargreaves Lansdown says: “Like the government, we are keen to see as many investors as possible taking on both the freedom and the responsibility to manage their own retirement savings. For a small number of investors, selling an existing annuity income in exchange for a lump sum may make sense. However, ever since this proposal was first made, we have been concerned that for many investors, it is likely to be a poor decision.”
This is because of the level of charges associated with the sale, as well as the tax payable on the lump sum, will mean many annuity holders will get much less back from the sale than they might have anticipated. The broker is also concerned that sellers may not be recognize the value of the income they are giving up or the increased risk of running out of money in their old age. For more on this read our article Will you sell your annuity?
Hargreaves Lansdown, however, has not ruled out offering an advisory service to customers that may wish to sell. “We will make a further announcement once we have reviewed the full regulatory and operational considerations involved in this market,” Mr McPhail adds.
Get independent “sense-check” before selling
The announcement coincides with the publication of a consultation from the Financial Conduct Authority on the role of the government’s free guidance service, Pension Wise, and its role in the secondary annuity market.
It is expected that policyholders with an income or value worth in excess of a certain threshold will be required to seek professional advice before selling their plan. However, Hargreaves Lansdown would also like to see those with less valuable annuities being made to get guidance before they sell up too.
Mr McPhail says: “For anyone not paying for advice before selling an annuity, a consultation with Pension Wise should be mandatory. The particular risks in this market are such that an independent sense-check from either a qualified adviser or from Pension Wise is a small inconvenience for the small number of investors who are likely to go ahead with such a transaction.”
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.