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The Government does a U-turn on a secondary annuity market

A key element of the package of pension reforms unveiled in 2015 by the former Chancellor, George Osborne, was the proposal to open up a secondary market for the sale of annuities. Now the Government has decided that this objective, aimed at giving consumers more options for a better income stream in retirement, has been abandoned.

The case for a secondary market for annuities was based on the belief that many consumers approaching retirement were finding that the insurance companies with whom they had placed their savings were giving them a poor deal when their accrued pension ‘pots’ were turned into annuities -- annual income streams for those approaching or in retirement. By offering a secondary market, where existing annuities could be sold for lump sums, the Government was hoping that competition between financial companies would result in better outcomes for consumers and greater flexibility to arrange for income in retirement.

A considerable amount of research into how a secondary market could operate has been undertaken - including by True Potential PUFin’s Jonquil Lowe and Will Brambley. Their 2016 research paper on ‘How might we create a secondary market for annuities that works for pensioners?’ has been very well received.

The reality has been, though, that the prospective market for secondary annuities has been found to be small and limited with few financial firms being interested in participating. As a consequence it was impossible to guarantee that a secondary market would provide good value to consumers. Critics of the former Chancellor’s proposals also pointed out that those selling their annuities in the second-hand market could get poor lump sums and be subject to high charges as well as being exposed to unscrupulous buyers.

As one alternative to helping consumers the Financial Conduct Authority (FCA) is to require that compensation is paid to consumers who received misleading or inadequate advice when they converted their pension ‘pots’ into annuities. Up to 90,000 people are forecast to receive recompense from this move. Annuity providers will review all their annuity sales since July 2008 and contact consumers about their entitlement to compensation.

So whilst the U-turn on a secondary market amounts to a reversal of a key part of George Osborne’s initiative to free up the pensions market, the Government’s decision is understandable given the potential new risks consumers could be exposed to in an imperfect secondary market.

Martin Upton

Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)

23rd October 2016

The establishment and activities of the Open University’s True Potential Centre for the Public Understanding of Finance have been made possible thanks to the generous support of True Potential LLP. True Potential has committed to a five-year programme of financial support for the Centre. Views expressed by True Potential PUFin may not reflect those of True Potential LLP.

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