Protecting policy holders and providers in the secondary annuity market
The secondary annuity market offers potential new freedoms for individuals who have already retired, however a number of issues need to be addressed before the market gains the liquidity that it needs to be successful. At a recent workshop held by Mazars at which Steve Webb (the former Pensions Minister) spoke, representatives from the insurance industry highlighted the three main issues which need to be resolved before the market can take off.
- How would insurers know when the original annuity holder dies and they should stop making payments?
- How can you ensure an independent, trustworthy and competitive market place is created?
- How can original annuity holders get the right advice and avoid bad decisions?
The secondary annuity market, a logical extension of the Government’s recent Pensions Freedom initiative, is intended to provide an opportunity for policyholders in receipt of an annuity from an insurance company to sell their annuity income stream by assigning it to a buyer. In return they get a cash lump sum which they can reinvest in a more flexible pension drawdown product or take as income (and pay the tax!).
The issue of what happens when the annuity holder dies is a major concern for insurance companies, who may be reluctant to allow the sale of the annuity streams if the issue is not resolved. Under the existing system the insurance company responsible for making the payments will usually know that the annuity holder has died when their bank account is closed and the annuity payment is returned to them. Alternatively, they might also find out when the next of kin informs them of the death. However, once the annuity has been sold neither of these mechanisms will work and the insurance company could continue to make payments to the new owner well after the original policyholder’s death.
A second major issue concerns the mechanism for buying and selling. Among other ideas an ‘eBay’ type of approach was widely favoured, where buyers have a window of opportunity and a hard deadline to bid for a given annuity or block of annuities. A single portal, possibly administered by the regulator, and which provided the only route by which the annuity could be sold, would be the solution most likely to breed confidence among sellers. The portal would offer prospective sellers a safe, competitive process to get a quote and hence provide the best protection against scams or less independent or competitive routes.
Another aspect of the process for buying and selling annuities is just how easy it would be for buyers and sellers to use. Buyers would offer their annuity streams and receive quotes from potential buyers. Although we are some way from determining the details, this process would require sellers to provide answers to health related questions. These questions would have to provide enough information for the insurance industry to make its valuation, but not ask for so much that sellers found them excessive.
The secondary annuity market would give policy holders more freedom, but also more responsibility. The decision they make regarding their annuities will affect them for the rest of their lives. Getting the right advice and guidance in this highly complex area could make the difference between a comfortable retirement and a less positive outcome. Free advice would help people to make the right choices and could be made compulsory for anyone considering selling their annuity. As Pension Wise already provides guidance in the area of pensions and retirement, it seems sensible to add annuity advice to its existing responsibilities and to increase its resources to cope with this extra requirement.
Finding a solution which addresses all these issues will help to make sellers feel comfortable, better informed and happy to take advantage of the possible benefits of the secondary annuity market. A thriving market where the buyers and sellers have a clear idea of the risks and rewards could help many people to achieve their retirement goals.