The chancellor George Osborne confirmed in his Autumn Statement last month that the government was on course to introduce a secondary market for annuities, allowing individuals to sell their annuity income stream. It is expected to open in April 2017.
The Treasury said it now would amend the Bank of England and Financial Services Bill to make seeking financial advice mandatory for those with higher value annuities.
Mandatory advice
The amendment will bring the advice requirement for annuity sales into line with existing approach used for individuals considering whether to transfer from defined benefit to defined contribution pensions, as allowed under the new pension freedoms which began in April.
Individuals with a final-salary pension and those in defined contribution schemes with safeguarded benefits are required to take professional financial advice before sacrificing pensions worth more than £30,000 ($45,400, €41,500).
“It is logical that a second-hand annuity market should operate the same way, with people compelled to seek an expert opinion before swapping in a valuable annuity for a lump sum or an alternative pension income product,” said Old Mutual Wealth’s retirement planning expert Adrian Walker.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, noted that the proposal was consistent with existing policy and added that it was definitely needed.
“It is essential that any development of a secondary annuity market incorporates appropriate consumer protections. Without suitable measures it could be too easy for investors to end up selling on their guaranteed incomes for rock-bottom prices,” he said.
Threshold key
“The critical question now will be where the Treasury sets the threshold for mandatory advice. There is already some concern that the current £30,000 threshold is causing problems, with some investors unable to obtain the advisory services they need.
“Any increase to the threshold would have to be accompanied by other suitable protections to ensure investors could make an informed choice.”
Under the new amendment the government will:
- compel the FCA to make rules requiring certain authorised entities to check that holders of a relevant annuity have received appropriate financial advice before they may sell their annuity
- provide the Treasury with delegated powers to determine what a ‘relevant annuity’ is, including what the threshold should be, how it should be calculated and whether it should take into account an individual’s circumstances
- give the Treasury delegated powers to specify what is meant by appropriate financial advice
The move is unrelated to the Financial Advice Market Review which the government is currently conducting in order to update its regulations on how financial advisers should work with consumers to take advantage of the new pension freedom.
