From 6 April 2017, individuals will be able to sell their annuity income stream for cash. The annuity provider would continue to make payments for the lifetime of the annuitant, but would reassign those payments to the new purchaser.
Under the proposed scheme, individuals will have three options for the proceeds of an annuity sale:
- Take it as a lump sum (taxed at the seller’s highest marginal rate);
- Pay it into a flexi-access drawdown policy; or
- Use it to purchase a flexible annuity.
Restrictions will apply where an individual has a dependant and, under certain circumstances, the dependant’s consent will be required before a sale can proceed. Also, protection will be required where the income is payable to a spouse or civil partner as a result of a pension sharing or attachment order.
The Government has acknowledged that consumer protection is essential and that this must be in place by April 2017 and is working with the Financial Conduct Authority (FCA) to develop appropriate controls.
As part of a range of controls and education to be made available, Pension Wise will be extended to cover the secondary annuity market, and annuitants with annuity income over a certain level will have to seek independent financial advice before proceeding. The FCA will also consider what risk warnings may be appropriate for a ‘second line of defence’.
These changes are intended to make the pension freedoms introduced in April 2015 available to an additional 5 million people who have already bought an annuity and would otherwise miss out. In reality, it seems that the people most likely to take advantage are those in greatest need of cash and the Government recognises the importance of providing individuals receiving means tested benefits and/or social care with clear information about the impact that annuity assignment will have on those benefits. The existing deprivation rules will additionally be applied to prevent people deliberately depriving themselves of income or capital in order to qualify for benefits.
While there are a number of difficulties still to be overcome, including judging the value of the annuity, the cost of advice, medical underwriting and death notification, the secondary annuity market will be a reality which providers – and the rest of the industry – need to be ready and prepared for.
If you'd like to discuss this subject further with us, please contact Stuart Tragheim, Business Development Director, Life and Pensions, Equiniti: firstname.lastname@example.org