The plan involves a wealth of consumer protection measures, aims to encourage competition among intermediaries and will make it mandatory for all fees and charges to be disclosed up front.
Contingent beneficiaries, such as spouses eligible to receive a widow’s pension, will also have to give their consent before any sale can go ahead.
The government proposals also make clear that the new market will not be restricted to UK firms, with offshore players welcome under certain circumstances.
Market plans
The proposals, contained in a consultation paper published by the Treasury and the Financial Conduct Authority (FCA) on Thursday, aim to “facilitate a clear and robust regulatory regime, which should in turn help the establishment of a credible and competitive secondary market for annuities”.
The industry has until 2 June 2016 to respond to the draft legislation.
The publication of the regulatory plan for the secondary annuities market, which is due to begin operating in April 2017, follows the release on Wednesday of a paper by HMRC which outlined new tax rules that will apply when the annuities are bought and sold.
In that paper the government said it expects that around 300,000 people will take advantage of the market to sell their existing annuities for cash or another pension product, such as a flexible drawdown policy. This equates to roughly 6% of the five million people in the UK who currently have an annuity.
Cautious welcome
Tom McPhail, head of retirement policy at Hargreaves Lansdown welcomed the proposals.
“The FCA has come up with a good package of measures to try and protect investors, while also giving them the freedom to manage their own money,” he said.
“All fees and transaction costs have to be disclosed up front, however they could easily absorb 10% or more of the value of the annuity, so this may also put a lot of people off.”
Steven Cameron, Aegon’s pensions director, noted how the government proposals had highlighted the fact that the new market wouldn’t be the right choice for most annuity holders.
“It’s vital that people have access to professional advice and guidance to make sure they get a fair deal and make an informed decision,” Cameron said.
“While a lump sum to spend today may be tempting, it’s important to think about whether you are relying on your annuity income to have a decent standard of living for the rest of your and your spouse’s retirement,” he said.
Missing pieces
Cameron also pointed out a number of missing pieces in the proposed new legislation needed to ensure the market worked efficiently.
“There is no central point for consumers to offer up their annuity to a range of buyers, with consumers instead being encouraged to approach each buyer separately to get the best deal.
“Each potential buyer may demand their own medical evidence which will be timely and costly.
“And for annuity providers to be comfortable to allow a customer to assign their annuity to an unconnected third party, they’ll want a reliable way of knowing when the annuitant dies and annuity payments should stop, but at present this simply doesn’t exist,” he said.
McPhail also had some concerns.
“Advice will be mandatory for investors selling an annuity above a threshold value, however the FCA has not yet determined what this value should be.”
“This is perhaps indicative of the wide uncertainty over the size, shape costs and viability of this market. There is still a lot of work to do between now and next April,” he said.
