The Government has announced that it's cancelling plans for a secondary annuity market, citing concerns about consumer protection. Essentially, this means pensioners won't be able to sell a poor-value annuity for a cash lump sum, but given there were fears that many could be ripped off – and that it wouldn't be the right decision for the vast majority anyway – the decision has been largely welcomed.
The secondary annuity market was first proposed in last year's Budget. The then-Chancellor, George Osborne, said he wanted to give pensioners already locked in an annuity contract the chance to benefit from the same pension freedoms as more recent retirees, by allowing them to "sell" the income they receive in return for a cash lump sum, without prohibitive tax charges.
The aim was to ensure that those who were receiving a negligible income from an annuity (which in many cases they were obliged to buy) would be able to sell it on and do something meaningful with the lump sum they'd get in return. However, while the intentions were good, the initiative was met with widespread concern, particularly over whether consumers could be certain they were getting good value from the deal. After much deliberation, it seems that the new Chancellor has decided that those risks were too great.
In a statement released yesterday, the Treasury said that, following discussions in recent months, "it has become increasingly clear that creating the conditions to allow a vibrant and competitive market to emerge [could] not be balanced with sufficient consumer protections". It added that, while some firms would be willing to allow customers to sell their annuities, there wouldn't be enough of them to create a competitive market.
The steps which would need to be taken to create such competition could "undermine other consumer protections", the Treasury said, adding that the Government "[is] not willing to allow a market to develop which could produce poor outcomes for consumers". These poor outcomes could include consumers receiving poor value for their annuity income, and suffering higher costs, which would make the sale far less beneficial.
The Economic Secretary to the Treasury, Simon Kirby, said: "It has become clear that we cannot guarantee consumers will get good value for money in a market that is likely to be small and limited. Pursuing this policy in these circumstances would put consumers at risk – this is something that I am not prepared to do."
Given that the Government had previously estimated that only 5% of people who currently hold an annuity would take advantage of the reform, the decision to not go ahead hopefully won't impact too many people. Indeed, the U-turn has been welcomed by many in the industry – and in many cases, by consumers themselves.
For example, Jon Greer, a pensions expert from Old Mutual Wealth, said that "the secondary annuity market was very likely to have been fraught with danger," and that "there were numerous unanswered questions about precisely how the market might operate". Indeed, consumers were also wary about the proposals, he said, citing research from Old Mutual Wealth which found that many feared they wouldn't get value for money.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, takes a similar view: "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 ... The risks to the vast majority of annuity holders outweigh the benefits for the small minority who could benefit."
As Tom pointed out, there could be many who are disappointed with the fact they won't be able to sell their annuity income, but in many cases, it'll be the right course of action. Those who only get a meagre income from an annuity would likely only receive a small lump sum anyway, and once charges and the possibility of getting a poor deal are factored in – regulators had predicted that sellers could face charges of up to 20% – the benefits become even less.
AJ Bell senior analyst Tom Selby said it was "difficult to see a long-term market where consumers would have received good value", a concern that becomes even more pressing when considering that pension scammers could have seen this as an opportunity to target annuity holders. All in all, it's largely felt that scrapping plans is the right decision, even though some may be disappointed.
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