Creating a secondary annuity market: response to the call for evidence

Introduction

As part of the March 2015 Budget, the Government announced its desire to extend the retirement flexibilities to annuity holders (see our Alert), publishing a consultation calling for evidence on creating a secondary annuity market.  The consultation invited interested parties to comment on the policy detail, asking questions which covered the scope of annuities eligible for sale, changes to tax legislation, how to encourage an effective market, and consumer protection.

On 15 December 2015, the Government published the response to the call for evidence.

In this Alert:

• A secondary market – the proposals
• Consumer protections
• Achieving the secondary market in practice
• Next steps

A secondary market – the proposals

The consultation

The original consultation proposed that the secondary market for annuities would be introduced from April 2016.

In the Summer Budget 2015, the Government announced that it intended to delay implementation until 2017, to allow time to work with firms and the FCA to develop “an effective package of measures” to protect consumers. The response document states that the Government is confident that a “framework will be in place by April 2017, and is committed to implementing the market by that date”.

The proposals

From April 2017, upon agreement with their annuity provider, individuals will have the opportunity to assign their annuity to a third party buyer in return for a capital lump sum.  The provider would then continue to hold the underlying assets and pay the annuity income to the third party for the lifetime of the annuity holder.

To facilitate this change, the Government will lift the pension tax restrictions on assigning annuities and also remove the “unauthorised payment” tax charge of 55% (or more), except where there is a partial assignment or surrender, which will remain subject to these charges.

Individuals will be able to assign an annuity purchased either before or after 6 April 2015, as well as one purchased in the future.

Individuals will be free to use the proceeds they receive from assigning their income stream how and when they want. They will able to take the capital lump sum as cash, or transfer it to an alternative retirement income product (eg to a flexi-access drawdown fund or a flexible annuity, ie one which may increase or decrease) to allow the individual to draw income over a number of years.  In each case, payments will be subject to taxation at the individual’s marginal rate.

Consumer protections

The response to consultation makes clear that the Government’s aim is to develop a robust consumer protection framework.  In the light of this:

• the Pension Wise service will be expanded to cover all those who hold annuities
• as announced on 9 December 2015, a financial advice requirement will be put in place for individuals with an annuity above a certain value, to make sure they have the support to make the right decision
• the Government will work closely with the FCA to consider how consumer protection will work in practice, and what further steps are required
• a new specific regulated activity for purchasing rights under an annuity on the secondary market will be created under FSMA
• the Government and the FCA will develop an online tool to help annuity holders understand the potential value of their annuities.

Achieving the secondary market in practice

Although a proportion of respondents thought annuities held by occupational pension schemes should be within the scope of the secondary annuity market, the Government has decided that DC annuities held as general scheme assets (and not in the name of an individual) will be out of scope. DB scheme annuities which are within an occupational scheme remain outside the scope. However, scheme trustees will able to permit assignment, should they and the member wish to do so.

The response acknowledges that, for most people, retaining an annuity will be the right decision. However, the circumstances in which it might be appropriate for someone to assign their annuity include where an individual:

• wishes to purchase a more flexible pension product
• wants to provide a lump sum for relatives or dependants
• has a change in circumstances, including divorce or marriage, in which situation a member may want to reconfigure an annuity from joint to single, or vice versa

Opinion was divided as to how annuity providers could be notified to cease payments upon the death of the original annuitant, given there will be no incentive on the original annuity holder’s estate to notify the annuity provider. Some respondents noted that existing data services could be used, while others argued for a government solution (such as a central “death register”). The Government has not yet reached a conclusion on this key point but will continue to explore possible “proportionate measures” to ensure timely notification.

Most respondents argued in favour of allowing providers to buy back their own annuities – on the basis that this might be most cost-effective – but with restrictions. To mitigate the potential risks of buy back, providers will be able to buy their own annuities but only indirectly (unless the annuity is “low value”), or after a competitive price has been determined, for example through an intermediary bidding platform, a broker or IFA.

As noted above, the Government plans to legislate to make buying back an annuity a regulated activity, and so providers will need to acquire this permission in order to buy back their annuities. In addition, annuities will not be made available for purchase by retail investors, but only to FCA authorised entities, to ensure stronger consumer protection and to help deter tax avoidance.

Finally, the FCA will monitor fees charged by providers to cover the administrative costs incurred in allowing an assignment, and will be asked to consider putting rules in place to ensure that any costs charged are reasonable.

Next steps

The supporting documentation issued with the recently published draft Finance Bill 2016 confirmed that measures to introduce the secondary market for annuities would be contained in the Finance Bill 2017.

The response document confirms that the Government will consult on the detail of the tax framework in spring 2016, and will also look to amend other relevant legislation. In addition, the FCA will consult on measures that are designed to both protect consumers and promote competition during the course of next year.