Ian Neale looks at the cons of selling annuities in return for a lump sum

A plethora of negative adjectives - mad, bad and dangerous being just a sample - decorate commentary this week on the government's Budget proposal to allow annuity holders to sell their future guaranteed income for a lump sum.

There are so many reasons why: this is one of the worst ideas I have seen floated since the first Big Bang in '88. It's in almost everyone's interest - not only the industry's - that it is buried before a lot of ill-feeling is stoked up.

The proposal, briefly, is that from April 2016, the restrictions on buying and selling existing annuities will be removed to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract and use that capital as they want, taxed at their marginal rate.

The annuity holder won't be allowed to sell their annuity back to their original provider; nor will the provider be allowed to purchase, and then discontinue, their own customers' annuities.

If a willing buyer can be found, however, a willing seller will not realise the full value of their annuity because, of course, a significant profit margin will be assumed to cover the mortality risk; there will be administration costs; and then there is the small matter of advice.

This is mandatory for transfers from DB schemes to PPs, and generally not advisable; to sell an annuity is to give up an even stronger guarantee.

The government acknowledges "there is a strong case for requiring annuity holders to take financial advice" but suggests "this requirement could be restricted to those looking to assign annuities that are valued above a given threshold" (GBP 30,000 is mentioned) - after noting that "judging the value of an annuity in payment is particularly difficult and complex and subject to behavioural biases". If a suitably qualified and willing financial adviser can be found, advice on such a matter will not be cheap.

Medical underwriting might be required by a prospective buyer, to guard against the selection risk: another cost. And once will not be enough: a minimum number of quotations are proposed.

Buyers might only be interested in bulk buying, so intermediaries will be needed, taking another slice of the pie.

The net result will be, at best, an offer which represents very poor value both objectively and in the eyes of the holder. Many of those who might be attracted to the prospect of a lump sum are likely to be barred because they are on means-tested benefits.

Of the rest, how many might accept an offer, other than the desperate? Very few: even the government acknowledges in the consultation launched alongside the Budget that for the "vast majority", continuing with their existing annuity will be the right choice.

When the annuity holder is disappointed by the offer, before they sell or later on, who will be criticised? The industry, of course. Buyers will be castigated as 'greedy vultures'. The risk of future mis-selling claims is an obvious deterrent to advisers.

The consultation document is open about the consumer protection issues - including the risk to dependants, who might at least be sharing the income while the annuity is in force. It is not hard to see the scope for selling an annuity to diminish financial assets ahead of marital separation and divorce, perhaps to assure a place to live in future.

The potential for collateral damage, ultimately to the taxpayer, is considerable.

In fact the condoc reads as if written by someone who knows the idea is a bad one but is trying to put the best gloss on it, under Ministers' orders. Given the small number of likely beneficiaries, why is the plan being floated at all? The answer might lie in Table 2.1 on page 64 of the Budget 2015 Red Book: in the first two years of operation the government estimates additional tax receipts of over GBP 1 billion - and a tax loss of GBP 250m over the following two years.

It is simply not in the industry's interests - nor, arguably, anyone else's outside the Treasury - to help the government make this work. We have more than enough on our plate already, striving to accommodate the ramifications and 11th-hour uncertainties of pensions flexibility.

This is an unwelcome and unnecessary distraction, and we should unite in saying so.

But it won't be enough for the industry to examine this patient and conclude it was dead on arrival; in the wider public interest it ought to be tagged 'DNR'.


Ian Neale, Director, Aries Pension & Insurance Systems Ltd