The best antidote to this in my view would be to ensure that the market is set up in a way that there are several potential buyers for each annuity. For this reason I welcome the government’s U-turn in allowing the original issuer of the annuity to offer a price to buy it back, albeit indirectly in most cases. If potential purchasers include the original seller, other life companies, pension funds and possibly other financial institutions, then the consumer will at least have a range of offers and will not be forced to accept the first price they are offered. If this can be achieved then the rather high profit margins which some have assumed would be a feature of this market can be driven out.
Another source of concern has been that people will be very disappointed by the prices they are offered because they got poor value in the first place, have already taken a series of payments since the annuity started and will now get ‘ripped off’ again. Having a large number of buyers will help with the last point, but recent trends in interest rates should also help. Indeed, in many ways, setting up a secondary market after a period of plunging annuity rates is the best possible time to do it. An annuity stream that was bought by a newly retired person in the late 1990s would cost roughly double for someone retiring now to buy at today’s annuity rates. According to some calculations, sellers could get a pleasant surprise with the capital sum they are offered simply because of the change in interest rates between when the product was purchased and the present day.
The secondary market could also offer one answer to the vexed question of what to do about people with guaranteed annuity rates under the ‘pension freedoms’ regime. At present, the problem is the people who have saved with products which offer them an attractive guaranteed rate of return but who want cash and who want it now. Some may be ‘insistent’ that they want cash even though an objective observer would conclude that they are going to get very poor value.
However, roll forward to April 2017 and a different opportunity presents itself. Individuals with GARs could take the generous guaranteed rate on the product and then sell it on immediately for cash. Provided that the frictional costs of this process are not excessive then this could offer a better outcome for people with guaranteed annuities than is currently on offer.
For those with larger annuities (not so far defined), the Treasury has said that there will be an ‘advice’ requirement, and the FCA is to consult shortly on the nature of that advice requirement. One concern is that if the FCA goes down the route of requiring new qualifications for advisers in this market, then this will both reduce the number of potential advisers and increase the costs. Neither of these seems to me to be a good outcome and the FCA should tread very carefully with regard to any new requirements for advisers.
