The government has confirmed that the secondary annuity market will not extend to defined benefit (DB) workplace pension schemes.
From 6 April 2017, the government will remove tax restrictions for individuals looking to sell their annuity. This will enable those with an existing annuity, as well as anyone who purchases an annuity in the future, to sell their annuity for an upfront cash lump sum or to place it into drawdown.
Only annuities belonging to an individual and held in their own name will be eligible for the new freedoms.
The announcement follows the government’s consultation into the introduction of a secondary annuity market, which was open to responses in March-June 2015.
The consultation found that there were mixed views about whether the scope of the secondary annuity market should be limited to annuities held outside of occupational pension schemes, as proposed in the consultation document. Most respondents agreed with the scope suggested on the basis that annuities in the name of the pension scheme are scheme assets and the member does not own the annuity.
Other respondents to the consultation thought that excluding annuities within an occupational pension could be seen as arbitrary, could lead to a divergence of opportunity and inequality, and would not allow the largest possible number of savers to participate.
To support the secondary annuity market, there are plans to introduce a comprehensive consumer protection package to ensure people make informed decisions about their retirement savings.
The Pension Wise service will be extended to cover the secondary annuity market, and the government will also work with industry and the Financial Conduct Authority (FCA) to create a simple online tool to help annuity holders to work out the estimated value of their annuity.
Ros Altman (pictured), minister for pensions, said: “Keeping an annuity will still be the right decision for the majority of people. But some were forced to buy annuities in the past that may not have been suitable for them, and I am delighted that this reform will allow more people greater choice and the opportunity of a more flexible income stream.”
Tom McPhail, head of retirement policy at Hargreaves Lansdown, added: “This is welcome confirmation of a widely expected announcement, which will now give millions more pension investors greater flexibility over their retirement income.
“Selling a guaranteed income will not be right for many people. Access to market competition to secure the best price and suitable information, guidance and advice should help to ensure that ordinary investors are protected and can make the best possible use of their money.”
The secondary annuity market will be a welcome addition to the pension freedoms but the government needs to ensure that it manages expectations around its introduction. As we’ve seen with the introduction of the new flat rate state pension, there’s a risk that complex changes aren’t communicated properly and people are left disappointed. With the secondary annuity market, there are huge considerations – it’s absolutely not as simple as filling out a form and cashing the cheque.
It’s also important the Government makes it clear that it thinks retaining an annuity will be right for the vast majority. Around 5 million people will be eligible but selling a guaranteed income for life is a huge decision. There are also the tax implications to consider. If an individual does assign their annuity for a lump sum, the sum will be taxed at their highest marginal rate. You may have a modest annuity of say £3000 per annum and depending on your other income, may be paying no tax on this. But if you assign it and receive say £50,000 you would pay 40% tax on part of this. If giving up a secure future income for life, we don’t want people to find they are ‘happy never after’.
Whereas many annuitants will welcome the opportunity to exchange core value annuities for cash, the government clearly shares the view of many advisers that for the ‘vast majority of customers, selling annuity will not be the best decision’.
This must be reinforced in all messages that are sent out direct to consumers over the next 12 months.
There are also some very significant operational details which have yet to be finalised and could materially affect the value of any sale for the individual. These include the level at which financial advice has to be obtained (and paid for) and exactly how the impact on means tested benefits will be measured. In this latter context the government is to consider whether it is ‘possible and appropriate to amend the existing deprivation rules to provide greater protection for public expenditure.’
The FCA has a big role in making this market work effectively. While we welcome the creation of a secondary annuity market, our experience with the DB market shows that people need advice and that getting the right advice can be challenging. If it is difficult for individuals to obtain the advice they need then there is a real risk that the market will not develop and all the effort involved in getting this new initiative off the ground could be wasted.
We now hope that defined benefit (DB) pensioners will be next in line and that the Government will give these individuals the opportunity to cash out or convert their future pension increases. Pensioners would always retain their current level of pension and this secure income base should make the need for advice much less compelling in this situation.