From the TUC

Annuity resales: At last someone in government has found the brake pedal

08 Jul 2015, by in Pensions & Investment

After a headlong rush into so-called pensions freedom, someone responsible for pensions policy in government appears to have found the brake pedal.

Tucked away in the Budget announcements was the news that attempts to launch a secondary annuity market will be delayed until 2017.

The failings of the annuity market are well documented.

Attempts to promote “shopping around” –  encouraging savers to compare prices and types of policies from a range of providers before making a purchase – have foundered on the hurdles of disparities of information, consumer inertia and industry reticence to change.

This has led to many people buying poor value or inappropriate products and therefore securing lower standards of living in retirement for themselves and their dependants than might otherwise have been achieved.

It is admirable that the government is seeking to address the consequences of these longstanding problems.

However, the sale of annuities in a secondary market should be approached cautiously to minimise the risk of more people facing hardship in old age and the undermining of trust in pensions more generally.

A delay might help gather information about what such a market might look like.

For instance, currently there is little evidence on the characteristics of those who would seek to sell an annuity. This makes it very difficult to assess the wider social impact of annuity re-sales. Will people just sell small contracts that are peripheral to their financial situation? Or will folk be tempted to cash in a policy that provides a core income stream simply to overcome short-term financial problems?

Likewise, we do not know of the demands of potential buyers, raising the question of whether the sorts of annuities they might wish to buy chime with the types of annuities that potential sellers would seek to dispose of. Will potential buyers only want the largest policies?

Such weaknesses make it very possible that a secondary annuity market may not take off at all. Another risk is that a market does emerge in limited form with thin buyer demand and the resultant poor pricing means that the only sellers would be the desperate and the poorly-informed.

Those on the lowest incomes could be particularly badly affected by poor decision making. People who receive means-tested benefits may find that they lose certain entitlements and risk hardship in old age if they sell an annuity.

Women, who are more likely to be the surviving party of a joint annuity and on lower incomes in retirement, could suffer hardship if insufficient account has been made of their life expectancy. On top of this, a report ‘Unequal, Trapped and Abused’ published by the TUC and Women’s Aid earlier this year highlighted the underreported and poorly recognised problem of  financial abuse which can affect women of all incomes. The sale of an annuity could be undertaken to assert control over secondary beneficiaries, particularly if their consent is not required.

Certain things can be done to minimise the risk of consumers being ripped off. The regime could be phased in, starting with small annuities. Regulated financial advice could be required for those who seek to sell an annuity of more than minimal value. Requirements for provision of information to potential sellers including comparison tables of sample sale prices.

Allowing more time to consider such measures is the sensible thing to do.

One Response to Annuity resales: At last someone in government has found the brake pedal

  1. “Shoulda, woulda, coulda”: yet more evidence suggests income beats choice in retirement
    Jul 14th 2015, 12:32 pm

    […] Strategic Society’ Centre’s work also casts doubt on the merits of creating a secondary annuity market that would allow people to cash in policies that provide them with a secure income in return for a […]