Secondary annuities market

Until April 2015, most people with defined contribution (DC) pension saving had to use them to buy an annuity or face a significant tax charge. However, under the ‘freedom and choice’ reforms, people aged 55 and over now have much more choice about when and how to draw their DC pension savings (Taxation of Pensions Act 2014).

The purchase of an annuity is typically a one off and irreversible decision, meaning that people do not generally have  the option to exit from the arrangement (see Cm 9046, March 2015, para 3.1). This left some annuity holders feeling that they were unfairly excluded from the choices being extended to others. So, in the last Budget before the 2015 general election, the Coalition Government proposed allowing people in receipt of an annuity to sell that income to a third party from April 2016. The proceeds of that sale could then be taken directly or drawn down over a number of years, and would be taxed at their marginal rate (para 1.229-231). In July 2015, the current Government said implementation “should be delayed until 2017 to ensure there is an in-depth package to support consumers in making their decision.” (HM Treasury, Summer Budget 2015, para 1.229)

In December 2015, following consultation the Government gave details of how the new market would work (see HM Treasury press release, December 2015). A core theme running through responses to the consultation was the importance of consumer protection and ensuring people understood the value of their annuities (HM Treasury, December 2015, para 4.2). To address this, the Government legislated in the Bank of England and Financial Services Act 2016 (s32-3) to give annuity holders access to the guidance service Pension Wise and for some to be required to take advice. The Pension Wise already provides some guidance if you are considering selling your annuity.

In April 2016, the Financial Conduct Authority said there was a “significant risk of poor outcomes for consumers in the secondary annuity market.” Annuities were inherently difficult to value and this market would include “a higher proportion of older, more vulnerable consumers.” It consulted on rules designed to help provide appropriate consumer protection while promoting effective competition (CP 16/12, para 1.7).

On 18 October 2016, the Government announced that it had cancelled plans to create a market for secondary annuities market. The reason was that it had become increasingly clear that creating the conditions to allow a competitive market to emerge could not be balanced with sufficient consumer protections (PQ 49517, 26 October 2016).  An FCA consultation on proposed rules and guidance was withdrawn at the same time.

In an urgent parliamentary question the following day, Liberal Democrat MP Greg Mulholland expressed disappointment at the “huge U-turn” and the failure to “build a reasonable secondary annuity market.” (HC Deb 19 October 2016 c810). The then Economic Secretary to the Treasury, Simon Kirby responded that it had become clear that consumer protection would not be adequate:

Throughout our investigations, one of our very highest priorities was to establish whether people could get a good deal through such a market. In the course of our efforts to investigate the viability of a secondary market in annuities, two things became clear. First, without compromising on consumer protections there would be insufficient purchasers of these annuities to create a competitive market in which British pensioners could get a good deal. Secondly, pensioners trying to sell their annuities would also be likely to incur high costs in doing so. This Government have made it very clear that we want this to be a country that works for everyone, and that includes making sure that everyone gets a high level of consumer protection. It has become clear, through our extensive research, that a secondary market would not be able to offer this. Rather than being to the benefit of British pensioners, it would instead be to their detriment. It is for that reason that we are not prepared to allow such a market to develop, and we will not be taking this policy further. (Ibid c809)

Shadow Treasury Minister Peter Dowd asked why the Government had not done the analysis at the outset (Ibid c811). The then SNP pension spokesperson Ian Blackford welcomed the “U-turn” but asked, why the matter had not been brought to the House (Ibid c812).

The Government’s decision was welcomed by industry commentators, on the grounds that the market would have come with considerable risk to consumers. On the other hand, former Pensions Minister Ros Altmann said it would be a disappointment to some who had been required to buy to annuity “they didn’t want and didn’t need” (BBC news, 19 October 2016).

The Government says it has no plans to review its decision:

The government announced in October 2016 that it would not be continuing with proposals to remove the restrictions on the sale of existing annuities.As these proposals progressed it became increasingly clear that the conditions required for a competitive market to emerge, with multiple buyers and sellers of annuities, could not be balanced with sufficient consumer protections. This could have led to consumers receiving poor value for their annuity income streams and suffering higher costs in the sales process. Consumer protection is a top priority for the government and it would not have been acceptable to allow a market to develop which could produce poor outcomes for consumers. There are no plans to review the decision not to continue with proposals for a secondary market in annuities at this time. (PQ 135978, 19 April 2018).

EDM 1459, which calls on the Government to “legislate to allow 5 million retirees to safely partially sell their annuity”, currently has six signatures.