“The industry and government will have to work together closely to ensure that the right framework and regulation is in place. We need a system people can trust, where they get a fair deal and are protected against fraudsters who could target any weaknesses in the system with potentially disastrous consequences, for often vulnerable annuitants.
“One of the fundamental challenges will be to help people understand whether the lump sum they are being offered is a fair swap in return for the guaranteed income they are sacrificing. One way of doing this would be to provide people with an initial independent estimate of how much their annuity might be worth on the secondary market although an individual’s life expectancy will have a major bearing and buyers will require medical evidence before finalising a price.
“We need to learn from this year’s freedoms and clearly highlight any potential risks for consumers. For example, we must avoid people cashing in an annuity, spending the money, being left with an income below the means tested benefit threshold and only then being told by the Government that they’ve lost their entitlement to a top-up. Many existing annuitants could end up taking a short term cash injection but paying the price later on in their retirement if they don’t get the right advice.”
In its consultation response, Aegon identified the following issues as of particular significance.
The principle challenges for annuity holders are as follows:
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Identifying if cashing in your annuity is right for you – the Government will want to promote this as giving freedoms to all pensioners but has said the vast majority will be better off keeping their annuity income
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Individuals may struggle to understand whether they are being offered a good deal – a lot depends on the annuitant’s life expectancy
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Annuities often continue to spouses on the annuitant’s death but this will be lost once sold on. This could create future issues, with women, who already often have insufficient pension provision, being disproportionately affected
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Cashing in an annuity may leave people with income below the means tested benefits threshold but without entitlement to claim a Government top-up
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Scammers will look to exploit any weaknesses in the market
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Many of these challenges could be mitigated by making financial advice compulsory but not everyone will be willing to pay for advice
The principle challenges for making the broader market work include:
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Making sure third parties purchasing annuity contracts are regulated otherwise customers won’t have the protection of sound marketing and compliance standards and HMRC will find it harder to collect the right tax
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Making sure the right advice is provided. Selling an annuity means giving up a lifelong guaranteed income and in many cases will be as complex decision as deciding to transfer from a final salary scheme to a defined contribution arrangement. The FCA will need to consider whether special advice permissions are required
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Finding reliable ways of notifying the original annuity provider when the annuity holder dies, so that payments to the third party don’t continue beyond their death
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Making it cost-effective, for example by allowing customers to be underwritten medically once, and to use that information with all third parties who might want to bid for their annuity
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