In last year’s Summer Budget, the government delayed the creation of a second-hand annuity market until 2017.
However, it is now understood to be looking at whether to include future annuity purchases in the scope of annuity reselling rules.
A lucrative trade
Is the government creating this market to remain popular with the electorate by giving them easy access to some of, but by no means all, the value locked in their pensions?
Or is the Treasury doing it to bring tax receipts forward into this parliament that would have been paid over many years, thereby pumping more cash into the economy?
It could be the former. The pension freedoms were immensely popular in the run-up to the general election, and extending that same access to cash to those feeling unlucky to have missed out would do the government no harm in the short term.
But, given the large amount of cash HM Revenue & Customs is set to pull in as a result of the introduction of the freedoms – the reforms are expected to bring the chancellor an extra £320 million in revenue in 2015/16, rising to £1.2 billion by 2018 – it is hard not to suspect cash is the motivating force.
Chance for the cowboys
The second-hand annuity market is a car crash waiting to happen. It presents wheeler-dealers with a golden opportunity to relieve pensioners of a chunk of their life savings, leaving the financial services sector’s reputation even lower than it already is.
The idea is a recipe for mutual mistrust. Insurers will have to load their prices so badly against the risk of selection bias (only those who think they are going to die sooner than expected will sell) and non-disclosure of medical conditions that honest punters will be offered a fraction of what their guaranteed income for life is worth.
Existing annuity holders will also be concerned to learn how little the annuity they bought just a few years ago is worth on this new market.
Notwithstanding the fact they probably could have bought a more valuable annuity rate at the outset, the sale price will be affected by the purchaser building in a risk cushion, a profit margin, medical underwriting factors, marketing and other operating costs, let alone the individual’s own advice costs if there are any.
What about the people who develop illnesses after they bought their annuity and who then try to sell them?
Yes, annuity vendors will have to make declarations as to their health condition at the time of sale, but if these come to light once the person is dead and gone, the purchaser will have bought a pig in a poke.
The moral hazard issues are huge, and the negativity that will surround the market will be intense.
Spend now, pay later
This is the latest in a series of spend now, pay later developments that the government appear to have made for short-term political and economic gain.
The consultation may have been extended to incorporate a 2017 launch date, but that means the policy has only been postponed.
Labour did something similar by fuelling the property boom and getting the population spending money they did not have. The current administration is inviting us to take money out of our pensions to keep the economy ticking over.
There is one shred of clear thinking in the consultation paper: access to the secondary annuity market may be restricted for those who do not have a base secure income sufficient to keep them off benefits.
This seems a sensible requirement for accessing the pension freedoms at all. A base income of say £12,000 a year would at least prevent the poorest from having to rely on the state. But it would cut many people out of the freedoms altogether.
The pension freedoms are as yet unproven. Many people will have better outcomes as a result, but we still do not know how many people will end up worse off.
The secondary annuity market policy is taking us even further into uncharted territory.
Sheriar Bradbury is managing director of Bradbury Hamilton
Source: New Model Adviser