The creation of a secondary market for annuities is a logical next step to the pension freedom reforms introduced in April this year. However, as with the previous reforms, it will mean pensioners will face more complex financial decisions and require support, protection and guidance to make the decisions that are best for them.
The need for this is underlined by the fact that there are relatively few circumstances, such as finding out about a life-limiting condition or the threat of repossession, in which assigning your annuity would be appropriate. Those consumers who might consider assigning their annuity in a secondary market could face the following issues:
- Double charging on the same pot of money – pensioners who will already have been charged when purchasing an annuity will face fees and charges which will considerably eat into their original pension pot;
- A lack of competition in the market if consumers are not given sufficient information and quotes;
- If providers are allowed to ‘buy back’ annuities, consumer inertia may prevent competition;
- Making good decisions will be based heavily on individual context, and Pension Wise has so far struggled to base advice on individual circumstances; and
- The expense of advice will deter many consumers, particularly those with smaller annuities.
As a consequence of this, The Money Charity believes that without significant action to improve consumers’ decision making, there is severe risk of widespread consumer detriment. In order to mitigate these risks and allow pensioners to take advantage of the very real benefits of greater freedom, we recommend that the following kinds of safeguards are built into the system:
- The FCA should monitor and establish ‘rules of thumb’ for fees and charges;
- Requiring a minimum number of quotes to be obtained before holders assign their rights;
- Asking providers to provide clear information on the financial implications of any decision, including an estimated remaining value of the annuity;
- Expanding the remit of Pension Wise to cover the new rules, with a particular focus on circumstance specific advice; and
- Requiring pensioners with larger annuities to seek advice before making a decision.
Only with the greater financial capability these kinds of safeguards would foster could the secondary market provide annuity holders with the wherewithal to make the decisions that are best for them. You can read the full text of our recent consultation response here.