Secondary annuities: Govt starts putting down advice parameters

The secondary annuity market will allow those already receiving an income from an annuity to sell it from 2017, but questions remain about the shape and viability of the market, consumer protection and tax.

The government tabled an amendment to the Bank of England and Financial Services bill this week, requiring those with “higher value annuities” to seek financial advice – though the precise value has yet to be determined.

It states the following:

• The Financial Conduct Authority will make rules to ensure annuity holders have received financial advice before selling;
• The Treasury will have delegated powers to determine to which annuities the rules around advice would apply;
• It will also have powers to decide what is meant by “appropriate financial advice”.

A policy paper announcing the requirement says: “The government will in due course consult over secondary legislation setting how details of how the advice requirement will operate – including threshold criteria.”

The industry was split as to what should qualify as a higher-value annuity, with many assuming the threshold for the advice requirement would be £30,000 – the same level as for safeguarded rights such as a guaranteed annuity rate.

Steven Cameron, regulatory strategy director at provider Aegon, said: “[Our] view is that, if anything, the starting point for seeking advice should be even lower.”

He continued: “There will be many people of advanced age who may not get value for money and might not understand that they won’t have that income.”

However, Tom McPhail, head of pensions research at investment platform provider Hargreaves Lansdown, pointed to the apparent difficulties faced by some with smaller pots in getting access to advice and whether the cost would be proportionate to the ultimate gain.

He added: “It’s of questionable value to take advice... we’re inclined to argue that the threshold could be put higher.” 

McPhail said further detail on the secondary annuity market is eagerly awaited and expected imminently.

“Hopefully [we’ll see] some frameworks for how the Treasury expects the market to operate. We’ve had enough time for them to reflect,” he said.

Bernie Hickman, managing director of individual retirement at Legal & General, echoed this. “The last thing we want in financial services is [a market] where people look back and say, ‘The right things didn’t happen’.”

Extending freedom and choice

Hickman added that the creation of a secondary market made sense as an “extension of freedom and choice” for people already receiving a pension, but said those who benefited the most would be the ones coming to retirement with guaranteed annuity rates.

Anne-Marie Winton, partner at law firm ARC Pensions Law, said the advice requirement was a recognition that higher earners were also likely to need help with retirement planning, despite the fact “there’s always been a belief that high earners will sort themselves out”.

However, she queried how advice would work in a totally new market.

“If you’re starting a new market you’re relying on an adviser for their professionalism, but how do they know how it’s going to work out?” she said.