A secondary annuity market can be beneficial for those seeking greater flexibility in retirement, however we must have the right rules in place to protect consumers, given the risk of poor outcomes for many.
KPMG has today called for the FCA to consider strong consumer protection in anticipation of a second annuities market being implemented. This follows the Treasury’s consultation how best to establish a market for second-hand annuities.
Andy Masters, head of savings and wealth management said, “A secondary annuity market can be beneficial for those seeking greater flexibility in retirement, however we must have the right rules in place to protect consumers, given the risk of poor outcomes for many.”
“The consultation approaches the need for consumer advice with an open mind. However traded annuities are effectively complex financial instruments which you cannot possibly expect the average person to understand. Decisions will also impact an individual’s tax position and potentially the system for benefits and long-term care. As annuities are a core safety net for many people and such transactions are irreversible, the wrong decision could be highly detrimental.
“Equity release is also a complex product targeting individuals in retirement and over the years we have seen strong consumer protection develop which has been beneficial. Equally, we would like to see the FCA explore tough consumer protection to avoid poor customer outcomes, mis-selling and scams.
“If Pensions Wise is to be extended to cover a second annuities market, it is likely to face significant pressure. It is imperative that it considers the potential changes it would need to make to ensure customers receive correct and sufficient guidance.”
The consultation paper outlines that the new flexibilities are only open to individuals and not those under occupational schemes. KPMG also points out that there are many potential costs behind annuity sales that customers would have to pay for – including the cost of medical underwriting - meaning that it may not suit many individuals with small pension pots.
Mike Smedley, pensions partner explained, “There is no clear rationale for excluding pensioners under an occupational scheme. This will create anomalies between defined contribution occupational, defined benefit schemes and individual pension contracts.
“It’s difficult to predict where secondary market prices might end up and it will depend on the appetite of investors to buy these annuities and the transaction costs involved. We might expect an annuity bought and sold on the secondary market a week later to lose 20% of its value. So buying or selling an annuity remains an important decision not to be taken lightly.
“The timing and circumstances of individual pensioners will also be significant factors. For example, a pensioner who retired in 2008 would have benefited from better annuity prices than today. They might have used a £40,000 pension pot to buy an annuity, and provided they are still in good health sell that on the secondary market for £40,000 today – and meanwhile have received over £20,000 in pension payments over the last seven years.
“On the other hand, someone whose health has deteriorated may get significantly less for their annuity. It’s easy to see how a pensioner with a retirement pot of £30,000 might draw pension for a couple of years and then in poorer health only be offered £10,000 to £15,000 for their remaining annuity.
“The costs behind a secondary market are significant. Not only would the customer have to pay for any advice, they would also indirectly have to pay for the technology, infrastructure, and underwriting costs involved – including costs for transactions quoted, but not taken forward by other customers. These costs could run into the thousands and for those with an average pension pot of £30,000, what is potentially unlocked net of any costs involved may be less than anticipated.
“While at this stage there are no clear cut winners or losers, the clear message is that we cannot afford for poor outcomes for individuals and we must focus on ensuring consumers will have the right protection in place.”
Simon Chan, KPMG Corporate Communications
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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.