The Financial Conduct Authority (FCA) consultation on a new secondary annuity market closed last week.
This market for secondary annuities is scheduled to be introduced in April 2017, allowing those who have already purchased an annuity with their pension pot to sell it for a cash lump sum.
The secondary annuity market is designed to be an extension of the pension freedoms introduced last April, giving people in retirement the flexibility to undo what were previously lifelong decisions about their pension pots.
With the introduction of this new secondary annuity market comes some big concerns about consumer protection.
In our opinion, selling an annuity for cash is unlikely to represent good value for money for all but a tiny minority of people.
In many cases, it could be an extremely damaging course of action.
When it comes to the secondary annuity market, there will be no second chances to make the right decision.
One pension provider has called recently on the FCA to go further in setting out clearly its protection measures for the disproportionately large number of vulnerable customers who might consider selling their annuity.
Aegon is also seeking clarity for financial advisers fearing that many will be reluctant to get involved unless they can be confident of the standards the FCA and Financial Ombudsman expects.
They believe that a lack of participating financial advisers would be bad news for consumers and could stop the market becoming a reality.
Finally, they have highlighted the fact annuities can be sold from next April not just for a cash lump sum but also to transfer into a flexible drawdown contract to allow ongoing income.
Aegon believes that many retirees will be unaware of this option once the secondary annuity market is introduced.
[tweet_box]There will be no second chances in the secondary annuity market.[/tweet_box]Steven Cameron, Pensions Director at Aegon said:
“While the secondary annuity market opens up new options for annuitants, selling an annuity means giving up a guaranteed income for life, a decision that’s irreversible with no second chances.
“Swapping your annuity for a cash lump sum could mean having no future regular income other than a state pension.
“The cash lump sum will be taxed and as it will be counted as income that year, it could push retirees into a higher tax band meaning they get back much less than expected.
“We need to make sure individuals appreciate that they can avoid this tax hit while still achieving more flexibility by transferring into a new ‘flexi access drawdown’ contract.
“With such an important decision and with the many risks and considerations involved, it’s particularly important that customers have access to professional advice.
“The Government plans to require customers whose annuity is above a certain value to obtain advice before they can assign their annuity.
“In this new market, which could attract a disproportionately high number of elderly of vulnerable customers, advisers also need to be confident of what’s expected of them so both the regulator and the financial ombudsman need to be very clear on what they view as sound advice.
“We agree with the FCA’s plan to show individuals how the amount they are being offered if selling compares to what the cost would be of buying that annuity today.
“But coming up with a reliable and relevant comparison will be difficult if the individual has a health condition that may affect their life expectancy.”
It will be interesting to see how plans for the secondary annuity market develop between now and next April.
Contributions such as this from Aegon add a great deal to an important debate and hopefully the FCA will be listening to this productive feedback.
