George Osborne used his pre-election Budget to confirm plans to allow pensioners to sell their annuity contracts for cash.
At present, people wanting to sell their annuity income to a willing buyer face a 55% tax charge or up to 70% in some cases. Osborne said he would remove this “punitive” charge so people are taxed only at their marginal rate.”
A Treasury consultation, which will run for the next 12 weeks, said the government was considering making advice mandatory for people looking to sell their guaranteed income.
“There is a strong case for requiring annuity holders to take financial advice from an independent financial adviser, with a requirement for annuity providers to check this before they enable the annuity to be assigned,” it said.
The paper said regulated advice would ensure people get the tailored help they need and a recommendation on whether assigning their annuity to a third party would be in their best interests. It added: “People would still be at liberty to choose not to accept a recommendation.”
But the government admitted: “Regulated advice can be expensive, as individuals could have to pay several hundred pounds or more, which might be a significant proportion of the value of their annuity.”
The paper also said the advice requirement could be restricted to those looking to assign annuities that are valued above a specific threshold, akin to the defined benefit transfer limit of £30,000. It said: “A means of approximating the value of the annuity in advance of advice would be needed under this approach. Consideration would also need to be given to what support is provided to those with annuities valued below this threshold.”
MGM Advantage pensions technical director Andrew Tully said significant consumer risk comes with the creation of a second-hand annuity market.
He said: “The issues are complex, but I can’t see how exchanging an income for cash upfront at a significant discount would make sense.
“From our calculations (see case study), you could lose 30% or more of your potential income because of costs and upfront tax. It would seem crucial that people are compelled to take advice before making this decision.”
He added: “There is also a sting in the tail for the potential purchaser of the annuity income as unless they are a registered pension scheme, the buyer will also need to pay tax.
“It is good to see the government has announced a formal consultation on this idea rather than simply present the industry with a fait accompli.”
Dentons Pension Management director of technical services Martin Tilley said it is unlikely the market will get off the ground.
“It is highly likely that advice will be required and that this is likely to have to be paid by the member and this cost will make the likely sale even less attractive. As a concept, the likelihood of a real secondary annuity market must be extremely small.
“It is also extremely likely that IFAs will not want to provide advice on the sale, as specialist knowledge would be required and the likelihood of a positive recommendation must be slim.”
Sheila, age 61, purchased her annuity in December 2013, right before Budget 2014 and the new freedoms being announced.
She had a life expectancy of 18 years due to high cholesterol and high blood pressure, and got an enhanced annuity rate of 6% on a pension worth £60,000 (£3,600 a year). Having heard the stories about the new flexibilities, Sheila decides to see what it could mean for her.
Unfortunately, since December 2013, her health has deteriorated and her life expectancy is now likely to be nearer 14 years. Her other secure income is valued at £10,000 a year.
For Sheila’s potential final outcome, see box, below.