HM Revenue and Customs (HMRC) issued a consultation paper on Wednesday setting out its proposals on how tax rules will have to be changed to allow the new market to function and develop.
“It is estimated that up to five million individuals receive payments under pension annuities and that some 300,000 of these individuals will choose to sell their annuity,” it said.
Trust scheme qualification
Steve Cameron, pension director at Aegon UK, said this was more than previously expected, and there was also an added surprise contained within the detail of the proposed new framework.
“Those receiving annuities to cover their pension from a trust based scheme may now qualify,” he said.
“Sometimes, trustees of workplace pensions have arranged for an insurance company to pay the scheme pension through an annuity. Here, the annuity may still be legally owned by the scheme but HMRC will allow the trustees to make changes to offer these members the right to sell their annuity.
“Trustees will need to consider carefully whether to do so, but where they do, it will open the secondary annuity market to more individuals than we’d previously expected. Most surprising of all, even those in defined benefit schemes where the trustees have arranged for annuities to cover pensions could become eligible,” he said.
Healthy demand
Jon Greer, pensions technical expert at Old Mutual Wealth (OMW), said research it had undertaken with research firm YouGov suggested the 300,000 number could be a significant underestimate.
OMW’s survey found that 17% of respondents indicated that they would be interested in exchanging their annuity for cash, mainly because they wanted to invest the money elsewhere or had a preference for a cash lump sum over a small annuity payment.
“This could mean that more than 850,000 people could be looking to sell their annuity, on the Government’s own estimates could result in around £2bn ($2.9bn, €2.5bn) in tax revenue in the first two years,” Greer said.
HMRC’s own estimates, published in the consultation paper, show the government expects a tax windfall of £960m in the first two years of the new secondary annuity market (to April 2019), though it also predicts a revenue loss in subsequent years meaning a net gain to the Chancellor of £665m.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said this would be a double win for the government, “giving annuity holders the chance to exercise more control over their savings, and raising extra revenue in the process”.
“Our own research indicates a healthy appetite for this market, though that will in the end depend on what kind of price investors are offered in exchange for their annuity income,” he said.
Deferred annuities
Aegon’s Cameron also noted that that HMRC proposed tax framework for the secondary annuities market also covered deferred annuities.
HMRC states that it is intended that individuals will be able to surrender or assign such (deferred) annuities and arrange for the proceeds to be paid to a new deferred flexible annuity or an uncrystallised money purchase arrangement (in anticipation of taking flexi-access drawdown at a later time) before reaching the normal minimum pension age of 55.
“However they will not be able to receive payments under the new annuity or uncrystallised arrangement before reaching age 55. Where the individual has reached age 55 but the annuity being assigned or surrendered has not yet come into payment, it is intended that the proceeds must be paid to a flexi-access drawdown fund (if the proceeds have not been used to purchase a new flexible annuity).”
Cameron said: “Whenever an individual receives a lump sum, they will be taxed on this as income tax and if the proceeds are significant, this could push them into a higher tax band meaning their actual lump sum may be a lot lower than they’d expected. If transferring into drawdown, they can spread income through their lifetime and will only be taxed when they take income.”
Next steps
HMRC said it had now begun a consultation period with the industry over the proposed tax framework which will run until 15 June 2016. It intends to publish draft legislation for consultation later this year, with a view to having effect from 6 April 2017. It is plans for any remaining changes to be included in primary legislation for which draft legislation will be published for consultation in Autumn 2016.
The government’s intention remains that all of the proposals will be included in the Finance Bill 2017 and will have effect from 6 April 2017.
The next step in the process is for the financial regulator, the FCA to publish its regulatory plans for how the interaction between buyers, sellers and intermediaries will operate, and consult on how to make sure individuals have suitable protections in place if they are considering assigning their annuity.
