Savers could be worse off than ever if a second-hand annuity market is created, argues Malcolm McLean, a senior consultant at Barnett Waddingham
Like many others within the industry I have serious reservations about Steve Webb’s original proposal (which may or not be taken forward by the new government) to allow existing annuitants to “sell on” their pension annuities to the highest bidder.
Whereas it could be argued that this is a logical extension of the new freedom agenda, it is in my view a bridge too far down that particular road and would inevitably lead to many consumers receiving a very poor deal if it were to proceed.
It is not clear to me that there is a market for such a proposition or even if there were whether it would function in an orderly fashion.
There are many practical difficulties around the sale. Annuity payments have to stop or be altered when the original owner dies but how will the new owner and the original insurer know this has happened? Furthermore how will an executor know that an annuity sold many years ago had even been owned, let alone have any way of knowing about the death of its former owner.
There would presumably have to be some arrangement for receiving regular certification of being alive in order to sell the annuity. The cost of this certification and the risk of early cessation of payment would inevitably reduce the value of the annuity. The purchaser would also need some evidence that the person had a reasonable life expectancy ahead of them and could provide medical evidence to that effect without which it is doubtful the sale would proceed
All this points to the likelihood of generally poor value offers being made with the annuitant probably having to obtain financial advice, itself a further cost he/she has to absorb. There is also a possibility of misselling claims further down the line.
The resale of existing annuities could be the thin end of the wedge”
I can understand that those who bought their annuities shortly before the new freedoms were announced in the 2014 Budget might feel they have received a bad deal and would like the opportunity to reverse the process at this later stage.
But if they did receive a poor value annuity originally and now receive a similarly poor deal second time around then they might feel at the end of the day they have been ripped-off twice. Hardly a satisfactory outcome from their point of view.
As our new Pensions minister expressed her support for the proposal prior to her appointment it may well be that this will go ahead in some form or another. However, I feel it would be a mistake to do so. And where does it all end? What about the people currently receiving occupational pensions? Will they be allowed to exchange them for cash? And taking that even further will the state pension be up for resale?
The resale of existing annuities could be the thin end of the wedge and as one wag once put it where the thin end goes today the thick end will inevitably follow on tomorrow.
Whether this will be the case remains to be seen.
Malcolm McLean is a senior consultant at Barnett Waddingham