Secondary annuity market: Brokers will need to set out charges upfront
The Financial Conduct Authority (FCA) has today published a consultation on its proposed rules and guidance for the secondary annuity market.
In the 2015 Budget, the government announced its intention to create a secondary market for pensioners who have previously bought an annuity to sell their guaranteed income in exchange for a lump sum.
There are around six million annuities currently in payment, held by about five million retired investors and the creation of a secondary annuity market extends the government’s landmark pension freedom rules to those who retired before April 2015 as they had little choice except to buy an annuity.
The FCA proposals comes just a day after HM Revenue & Customs published a tax consultation on how the secondary annuity market would work when it launches in April 2017.
What’s the FCA proposing?
The FCA has proposed that brokers must set out their charges up front and agree them with the consumer selling their annuity, rather than being paid by commission from firms acting as buyers.
In order to help consumers judge the value of their annuity income, the FCA has outlined that buyers and brokers making an offer for a seller’s annuity income will be required to present their offer alongside the ‘replacement cost’ of the annuity income, if it were to be bought new on the open market.
The firms will also be required to provide risk warnings and recommend to those wishing to sell their annuity to seek financial advice from the government’s free Pension Wise service. They’ll also need to tell sellers to shop around.
Further, annuity providers will only be able to recover reasonable costs when charging to facilitate annuity income sale and that the sale of the annuity will fall within the scope of both the Financial Ombudsman Service and the Financial Services Compensation Scheme.
Good measures designed to protect investors
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: “This is a complex market to create from scratch, however we know many annuity holders will be interested in trading in their income for a lump sum.
“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. 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.”
However Andy Bell, chief executive of AJ Bell, said it’s hard to see how a sustainable, long-term secondary annuity market will function, given that we don’t know who the buyers will be or the composition of the sellers.
He added: “We remain concerned that someone who has been ripped off once when buying an annuity could be ripped off again when they sell it.”