There were good reasons for the government to drop plans for a second-hand annuity market
If you thought a new broom at the top of the Treasury would herald an era of ‘no alarms and no surprises’ policy decisions, think again.
Without warning plans to allow annuity holders to sell their policies in exchange for a cash lump sum from April 2017, have been canned by chancellor Philip Hammond.
A statement from the Treasury said: “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.”
The timing may have been unpredictable, but perhaps it wasn’t that much of a surprise. Of all the changes brought about by freedom and choice, none have been received with as little enthusiam as secondary annuities. Then-chancellor George Osborne announced the plans in March 2015 but in the intervening year and a half, no large insurer or broker has shown appetite for launching an annuity buying service.
When leading broker Hargreave Lansdown distanced itself from the plans, announcing in September 2016 that it was not interested in entering the market, the writing may have been on the wall. In a tweet, Tom McPhail of Hargreaves Lansdown said “Having spent considerable time in [the] past year on the secondary annuity market, I am deeply relieved the government has abandoned this policy.”
Serious doubts were also raised about the value that consumers would receive when selling an annuity. “The market woud have been stacked in favour of the buyer,” says Tom Selby, senior analyst at AJ Bell. He adds that the plans would have posed “unacceptable risks” to those looking to offload an annuity, both in terms of charges and the risk of pension scams. “It was difficult to see a long term market where consumers would have got good value,” Selby concludes.
Introducing a secondary annuity market was supposed to bring the spirit of freedom and choice to anyone who had already bought an annuity and wanted to reverse the decision. For buyers who had annuitised a small pot, bought a policy at a poor rate, weren’t made available of the the full range of options available to them, or subsequently developed a life-threatening illness, the decision to ditch the legislation may be unfortunate. Even in those circumstances, however, the risk of punitive charges would still have applied - and the vulnerability of some individuals could have pushed the exploitation factor even higher.
A better focus (although admittedly not much use to those already saddled with an unwanted annuity) would be to ensure that the guidance and advice on offer about retirement savings is as good as it can be. Michelle Cracknell, chief executive of The Pensions Advisory Service (TPAS) has pointed out that the information TPAS callers really want is rarely the answer to their original question. Helping scheme members of all ages to better understand their choices, then equipping them to ask the right questions and make better decisions would be preferable to creating a high-risk service for reversing mistakes.