Consultation on "selling on" annuities has a multitude of complications to address
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Consultation should consider whether funds can be moved into flexi-access drawdown to maintain tax efficiency
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Buyers of annuities will insist on understanding health of annuitants
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Joint life annuitant’s dependents must be involved in the decision
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Detailed consumer protection will be required
Steven Cameron Regulatory Strategy Director at Aegon said:
“The ability to assign future annuity instalments in return for a cash lump sum or flexi-access drawdown pot will appeal to some, but it won’t be in everyone’s interests. The call for evidence correctly focusses on three key areas - the scope and operation of the secondary market; tax implications; and consumer protection which is particularly key as many being offered this new option may be elderly or vulnerable.”
“It’s good to see the Government making clear that they consider most individuals will be better retaining their annuity – we agree this will be something which is likely to be sensible only for a minority or for those whose annuity may be only a small part of their overall retirement income.”
Annuity to flexi-access drawdown
“The attractions may increase if transferring the proceeds into flexi-access drawdown can be made workable without adverse tax consequences. This would mean funds continue to be used within a pensions wrapper to provide a regular, but more flexible retirement income.”
Underwriting will be required
“We fully expect individual underwriting to be required because buyers won’t be able to offer a price without information on the individual’s life expectancy. This makes providing benchmark selling prices or shopping around “before you sell” problematic – each prospective purchaser might demand their own medical evidence. For joint life annuities, both partners may need to provide medical evidence.”
Joint life annuities and protecting dependants
“The risks of assigning joint life annuities need further careful consideration – unless all dependants are party to the agreement, we are storing up shocks for widows and widowers who might otherwise not know their deceased partner has cashed in their future income too. This could be another area where women suffer – they already on average have lower private and state pensions.
“For joint life annuities, we can’t see how assigning only that part of the annuity paid to the main life can be made workable.”
Consumer protection
“The risk of consumer detriment here is arguably higher than with any other retirement decision. Anyone turning future annuity income into cash is giving up a guaranteed flow of income – for their and possibly a partner’s future life. Swapping this for a lump sum, calculated based on a range of factors, is undoubtedly a complex and risky decision and we believe specialist advice will be essential. Our starting position would be to require the full range of FCA protections, similar to those transferring out of defined benefit schemes – compulsory advice alongside risk warnings.”
“Pension Wise may have a role to play here, for example in explaining implications on means tested benefits. The Government rightly wants to avoid individuals ‘opting into’ means tested benefits so those who take and spend the cash shouldn’t expect to then start claiming extra benefits.”
Who will qualify?
“The right to assign will not extend to those receiving a pension from an occupational scheme. The difference between this and having an annuity may not be clear to all.”
Notification of when the annuitant dies
“Existing annuity providers who agree to assign future instalments will face complexity and increased risks of not being notified of the death of the annuitant. We believe Government can play a more central role in notifying of deaths, perhaps linking into state pensions.”
Those making future retirement income choices
“For customers choosing between drawdown, cash and annuity purchase in future, we don’t believe the announcement changes the respective merits of each to any significant extent. Annuity assignment is unlikely to be appropriate for the majority of annuity purchasers and those purchasing an annuity shouldn’t be doing so with the intention of assigning at a later stage. We will, however, need to reflect the proposed changes in customer guides – and we expect the Government to do so within Pension Wise.”
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