Secondary Annuity Market – pipedream or reality?
25 / 05 / 2016
Stuck with an annuity or deferred annuity? Don’t worry, help is close at hand. From April 2017, you can sell your right to income for a capital amount! This is the simple plot. However, this depends on the Government passing a lot of new legislation between now and April 2017 and insurers entering the market.
The unfreezing of annuities is the bedfellow of the pension flexibilities introduced by Government in April 2015. In our view, the political will to free up the annuity market and push through the necessary regulatory and tax changes is great. You should expect to see everything in place by April 2017.
There is likely to be appetite from annuitants and insurers, but whether the market will develop depends on the Government getting the balance right between protecting the individual annuitant and providing a workable market for insurers.
How is the Secondary Annuity Market going to work?
Q. What is the scope?
A. The market will cover individual annuitants whether their pension is paid to them under a policy in their own name, or under a policy in the scheme trustees’ names where the trustees pay the amount to the individual.
Q. Who can acquire the annuity income?
A. Either the original insurer who issued the policy, or a different insurer or provider can acquire the annuity income. The transaction will be regulated under the Financial Services and Markets Act so the Financial Conduct Authority will act as the supervisor.
Q. Can only a capital amount be received on selling an annuity?
A. No, a capital sum is one of the possibilities. The others are a flexible annuity (an annuity which can go down as well as up in value) or placing the sum in a flexi-access drawdown arrangement.
Q. Can only part of an annuity be released?
A. No, you can only release all of the annuity or nothing.
Q. What about vulnerable elderly pensioners?
A. The FCA already imposes strict rules for advisers dealing with elderly persons, especially those with mental capacity issues. These rules will be applied to the new activity of advising individuals on sales of annuities.
Q. What about contingent beneficiaries? For instance an annuity which after the annuitant’s death pays an annuity to the survivor?
A. Reasonable steps will need to be taken by annuity providers to obtain, prior to the annuity sale, consent from contingent beneficiaries, as on the sale contingent beneficiaries will lose their prospective entitlement as the survivor pension will be paid to the annuity buyer.
Q. Are insurers to be obliged to purchase annuities?
A. No, insurers will not have to purchase annuities.
Q. Must an individual take advice before selling his/her annuity?
A. Yes appropriate advice from an FCA authorised adviser will be needed, although for smaller value annuities advice may not be required. In other words, requirements similar to the ‘advice’ requirements for DB to DC transfers. Risk warnings will need to be given along with signposting to ‘Pension Wise’ Guidance.
Q. Can the insurer choose how to present the quote and the price?
A. No, not completely as this will be impacted by FCA requirements.
Q. My annuity dies with me, so should I consider selling my annuity for a capital amount?
A. Yes, indeed, subject to obtaining FCA regulated advice, as the tax position on death may be favourable – please see the tax points below.
Key tax points to be aware of:
The above questions and answers give a flavour of how the Secondary Annuity Market is intended to operate. They are not in themselves advice.
As so often with pensions, tax is a key element. Here are some key tax points to be aware of:
- Providing the sale conditions are satisfied (e.g. entire annuity sold), the amount received by the individual will not be treated as an unauthorised payment and therefore will not be subject to the extra tax charges that currently apply on the sale of an annuity.
- Where the individual receives the proceeds as a capital sum, income tax applies at the individual’s marginal income tax rate.
- Alternatively, the individual may decide to apply the proceeds to purchase a flexible annuity, or place the proceeds in a flexi-access drawdown fund.In both cases there is no tax charge on inception; when income is subsequently paid from the flexible annuity, or drawn from the flexi-access fund, it will be taxable in the usual way.
- On death, the flexi-access funds will be treated in the same way as other flexi-access funds as from April 2015. In other words, where the member dies under age 75, amounts subsequently withdrawn from the ex-annuity flexi-access fund by the dependant or nominee of the deceased member will be free of income tax. Therefore, individuals holding annuities who wish to encash their annuities and pass on the value of the encashed annuities within the wrapper of a flexi-access arrangement to the next generation may find the April 2017 changes useful for estate planning.
Whether it is wise to give up the guarantees implied in an annuity is a matter on which an individual will need financial advice, and the advice will vary according to the individual’s personal and financial circumstances.
Whilst there are many legislative changes to pass through Parliament ahead of April 2017, it looks as though the Secondary Annuity Market will burst into life in April 2017. This is good news, at least for some annuitants!
For further information on the topics raised in this article, please contact a member of the Pensions & Employee Benefits Team.