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Government scraps secondary annuity market plan

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Written by: Paloma Kubiak
18/10/2016
The government has announced it has cancelled plans to create a secondary annuity market amid concerns over consumer protections.

From next year, pensioners who previously bought an annuity were expected to be able to sell their guaranteed income to a third party buyer as part of new rules to expand pension freedoms.

At the time of the proposals, the government said that for the majority of people, keeping their annuity incomes would be their best option and it estimated that only 5% of people who currently hold an annuity would take advantage of this reform.

But in a “surprising” move, the government has today confirmed that it has cancelled plans to create a secondary annuity market.

It cited that the conditions to allow a competitive market to emerge “could not be balanced with sufficient consumer protections”.

While many firms have shown they are willing to allow customers to sell their annuities, the government is clear “there will be insufficient purchasers to create a competitive market”.

It said consumer protection is a top priority so it is “not willing to allow a market which could produce poor outcomes for consumers, such as receiving poor value for their annuity income stream and suffering higher costs”.

Below we look at the instant reactions from some of the pension industry experts.

‘It is the right decision’

Tom McPhail, Head of retirement policy at Hargreaves Lansdown, said: “This will no doubt come as a disappointment to some annuity holders who were looking forward to restructuring their retirement income, however it is the right decision.

“After extensive research, at the beginning of September Hargreaves Lansdown, the UK’s largest annuity broker announced that it would not be participating in the secondary annuity market. Our reasons for this decision were very similar to the government’s. The risks to the vast majority of annuity holders outweigh the benefits for the small minority who could benefit.”

McPhail added that the move represents an “interesting political change of direction” as the pension freedoms were George Osborne’s baby. “The secondary annuity market concept was enthusiastically supported by the two most recent pensions ministers. The fact that it has now been dropped could be indicative of a new government which is progressively shedding the legacy policies of the Cameron/Osborne era and is increasingly pursuing its own agenda.”

‘Cancellation quashes extension of pension freedoms’

Paul Green, director of communications at Saga, said: “This is a surprising announcement. The initial decision to give people the power to sell their annuity was borne from pension freedoms introduced last year and the desire that all retirees could enjoy them. The cancellation of the secondary annuity market quashes that notion.

“There will be many pensioners who will be sorely disappointed – thousands of people who receive minimal income from annuities they were forced to buy would have benefitted from a way to sell their annuity. Research carried out by Saga found that 58% of people who wanted to sell their annuity were receiving such a small income they could do nothing meaningful with it. It looks now that there will be no way for them to turn that meagre income back into a lump sum.”

‘It’s failed even before it started’

Andrew Pennie, head of pathways at Intelligent Pensions, said: “So the secondary annuity market has failed before it even started. This is not such a bad thing and while a small number may well have been looking forward to the opportunity of selling their annuity, overall it’s probably an unnecessary distraction avoided.

“The main reason behind this decision is the risk of poor consumer outcomes; people most vulnerable and in need of ongoing income attracted by the lure of immediate cash. It was always a challenge to see how value could be achieved for an annuity seller in a market that was going to incur costs of underwriting, general administration and in all likelihood, regulated advice. With a relatively small percentage of people predicted to use the secondary annuity market, in the absence of value for the user I think it’s right the government has put this initiative to bed.”

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