In March 2015 the Government announced that it would extend the pension freedoms to those who had already bought an annuity with the proceeds of their defined contribution pension savings. The government proposes to do this by changing the tax consequences that currently apply to a person wishing to sell their annuity income, with effect from April 2017.
The rules and guidance aim to balance the need to support this new market with protecting consumers.
Christopher Woolard, director of strategy and competition at the FCA, said: “Opening up this market extends the government’s pensions reforms to those who have already bought annuities, however, there are potential risks involved for consumers and we recognise that some consumers may be particularly vulnerable.
“We have set out proposed rules and guidance today that will help ensure that consumers have an appropriate degree of protection should they decide to sell their annuity income.”
The government has confirmed that buyers and brokers in this market will need to be authorised by the FCA.
The FCA has proposed that brokers must set out their charges up front and agree them with the consumer selling their annuity, rather than being paid by commission from firms acting as buyers.
In order to help consumers judge the value of their annuity income, the FCA has proposed that buyers and brokers making an offer for a seller’s annuity income will be required to present their offer alongside the ‘replacement cost’ of the annuity income, if it were to be bought new on the open market.
Under the FCA’s proposed rules firms will be required, at the earliest opportunity, to give those considering the sale of their annuity specific risk warnings and to recommend that they seek regulated financial advice or guidance from Pension Wise. Firms will also be required to recommend that sellers shop around.
Among the other proposals in the consultation paper, the FCA has proposed that annuity providers will only be able to recover reasonable costs when charging to facilitate annuity income sale and that the sale of the annuity will fall within the scope of both the Financial Ombudsman Service and the Financial Services Compensation Scheme.
The consultation also reminds firms of their existing responsibilities to treat appropriately those consumers who may not have full mental capacity.
The FCA consultation is open until 17 June 2016.
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