What value second-hand annuities?
The proposed secondary annuity market has very little going for it, says Mike Morrison, head of Platform Technical, AJ Bell
During the last year-or-so of hosting presentations, I have been asking my adviser audiences for their views on the proposal to create a secondary annuity market, and whether this is something that they might want to participate in.
Often the questions I ask get a mixed response but on this subject I have never had such unanimity – the answer has been a large and resounding “No”! Not one adviser in all the audiences that I have asked seems to have any interest in this new development.
There still seems to be some doubt as to whether it will proceed in April – indeed, in the run-up to the forthcoming Autumn Statement many commentators have called for it to be abandoned entirely. However, there was a story in the trade press last week suggesting that we are still on track for the proposed launch date. The story mainly concerned the advice threshold for such annuities, and this has been flagged as one of the key decisions in the design of the service.
We have always known that there will be some form of advice threshold, in the same way that there is for defined benefit transfers, with the perception that the decision is a difficult and important one and that professional advice is necessary at a chosen level.
Such a level is always something of a random choice. With DB schemes it was set at £30,000 CETV and upwards – much to the annoyance of many who question why they can transfer their DC benefits without advice but have to pay for the ability do the same with their DB pension. (And with many advisers not wanting to get involved, and those that do charging accordingly!)
So how do you set an advice level for annuities? Should it be based on the level of income being received or the original purchase price? It could have been purchased many years ago when rates were at a totally different level. Does it matter whether there is a contingency benefit for a spouse or dependant, whether the annuity has generous indexation or whether there are guaranteed rates in the policy? Should it be equivalent to the DB level?
This will be an important decision to make. From a practical position, at what point is advice needed? If the advice level is low, more people will be required to seek advice, which is surely a good thing. But will there be anyone there to provide it? If my straw poll is anywhere near correct then there will not be many advisers participating in the market and those who do will probably set their charges accordingly.
If the advice level is high then surely it will defeat the purpose of the threshold, and it might even be suggested that the level has been set high to make sure that the overall policy is successful in terms of getting as many people through the door as possible. But at what cost to customer outcomes?
This is just one key point in a facility that seems to have very little going for it – tax, losing a guaranteed income, getting a fair price (and understanding that fair price) and loss of contingent spouses benefits.
In a time of increasing longevity, can selling an annuity ever be the right thing to do?