Are we heading for the great annuities sell-off?
Despite 160 pages of FCA document, what do we really know about the secondary annuities market and how might advisers respond? Tom Selby, senior analyst, AJ Bell, looks at the issues
“Government sets free savers mis-sold dodgy annuities by greedy insurers”. This is perhaps the headline George Osborne hoped to see accompanying the creation of the secondary annuity market.
But worryingly, despite publication of a mammoth 160-page FCA document setting out how the market will be regulated, there remain more questions than answers.
First and foremost, which savers will be required to take advice before cashing in their guaranteed income? Both the Government and the FCA have been clear that an advice requirement will exist, with details set to be outlined in the Bank of England Financial Services Bill.
The principle appears identical to the pension freedoms – where anyone with guaranteed benefits worth £30,000 or more must take advice before cashing in – and we expect this to be mirrored in the secondary annuities world.
Whether advisers will touch this business with a bargepole, particularly given the ongoing issues around dealing with insistent clients, remains unclear. In the conversations I have had with IFAs, the overwhelming response has been “not a chance”.
Advisers are not the only intermediaries the Government is relying on to get this market going, however. Non-advised brokers will play a key role connecting annuity sellers with annuity buyers, and so it’s welcome the regulator is taking a hard line on both charging methods and transparency in this area.
Who pays and what?
Commission will be banned in the secondary annuity broker market – perhaps sounding the death knell for non-advised commission full stop – with firms required to agree a charge upfront with the customer that will then be paid as a fee or from the product.
Transparency will also be baked into the system through a mandatory price comparison rule. This will mean buyers and brokers will have to display clearly both the price they are offering for the annuity (net of charges) and the replacement cost for the annuity if it were bought on the open market.
So far, so good, you might think. Mandatory advice for larger annuities to prevent the worst selling decisions, strict transparency controls to ensure people know what they’re giving up and a ban on commission to eradicate bad incentives should, in theory, ensure the market works well.
Each of these parties will need to be paid, however. Let’s assume someone wants to sell an annuity worth £30,000. When fees for brokerage, regulated advice and the selling insurer’s administration are stripped out, somewhere north of £1,500 will already have gone from their pension – and that’s before the buyer’s profit margin or the tax consequences of withdrawal are taken into account.
This tax problem can be mitigated if, rather than taking a lump sum, the saver shifts the value of the annuity directly into flexi-access drawdown. But the reality is many will simply want the money now.
So what exactly will the market look like? According to HMRC, around 300,000 savers are expected to cash in their annuities in total, boosting Treasury coffers by close to £1bn in the first two years as cash withdrawals push savers into higher income tax brackets.
This looks more like a firesale than a sustainable market. The greater choice and competition invoked by the pension freedoms – along with tougher regulatory scrutiny – means mis-selling of annuities is likely a problem of the past rather than the future. So we will see a surge in demand for people to cash in poor value annuities in the first year or two – but then what? Who is going to spend the time, effort and money necessary to build a proposition for a market that might only be attractive for a couple of years?
And who are the buyers? Insurers will be able to purchase existing policies (provided an adviser or broker is involved), but firms excited about the prospect of entering the secondary market haven’t made themselves known yet. The fact the regulator is allowing providers to buy back annuities also opens up the risk that savers will be ripped off by the same company twice – once on the way in, once on the way out.
The Government’s initial timetable for the introduction of a secondary annuity market was April this year. That was pushed back to April 2017 and, judging by the long list of issues still to be resolved, a further delay looks a distinct possibility.
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