“Opening up the pensions freedoms to allow those with existing annuities to sell them on will be an attractive option for many of the estimated 5 million existing annuitants. The ability for pensioners to determine how to use their retirement assets is welcome, however pensioners need to be aware of the risks of running out of money later in retirement if they underestimate how long they will live.
“Research the IFoA commissioned from YouGov found that the majority of people surveyed aged 55 or over who had an annuity would not want to cash it in. Additionally, 40% believe there is a high risk they could end up worse off by cashing it in. Annuities are therefore likely to continue to play an important role in the pensions market as people value the certainty of an income for life. This finding is consistent with the Government’s own view – for most people, retaining an annuity will still be the best choice.
“In this new framework, consumer protection will be essential. It is crucial that adequate safeguards are put in place to protect pensioners and that appropriate financial advice is made available to them so they understand the risks they may be taking. This would go some way to reduce the potential risk of mis-selling and pensioners suffering from financial hardship in later life, as those who are less well-off may have a greater need to sell their annuity to use the money to meet more immediate needs.
“It is yet to be determined whether annuity surrender values will offer good value for money for pensioners, and individuals may find it difficult to determine a fair value. The proposed online tool is a step in the right direction but would need careful development to be useful. The extension of the Pension Wise service to cover the secondary annuity market is also a welcome development, although actual take up of this free and impartial service so far has been lower than the Government would have wanted.
“The IFoA also welcomes the plans for further consultation on how the FCA will approach authorising firms. Additionally, there are a number of practical challenges: keeping track of whether annuitants are still alive once payments are redirected will need to be resolved; and insurers will need to ensure appropriate medical underwriting is in place at the time of purchase, as those in ill health may be more likely to sell their annuity than those in good health.”
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