Economic Secretary to the Treasury Harriett Baldwin, today (15 December) announced that more than five million people will be able to sell their annuity from 6 April 2017, as the government outlined plans to extend its landmark pension freedoms and create a new secondary annuity market.
In the government’s response to the recent consultation into the introduction of a secondary annuity market published today, the government confirmed that from 6 April 2017 tax restrictions for people looking to sell their annuity will be removed, giving five million people with an existing annuity, and anyone who purchases an annuity in the future, the freedom to sell their right to future income streams for an upfront cash sum.
These changes will give people the freedom to use that capital as they want – just as those who reach retirement with a pension pot can do under the pension freedoms introduced in April. Under the new changes retirees will be able to take the annuity as a lump sum, or place it into drawdown to use the proceeds more gradually.
The Economic Secretary also set out further details on how the new secondary annuity market will work, including:
- setting out that pension annuities belonging to an individual and held in their own name will be eligible for the new freedoms
- requiring that all UK-based annuity purchasers and intermediaries are regulated by the FCA
- allowing annuity providers the choice to buy back an annuity, subject to robust safeguards
- introducing a comprehensive consumer protection package to ensure people make informed decisions about their savings, including:
- extending the free and impartial Pension Wise service to cover the secondary annuity market
- requiring individuals to seek independent financial advice for annuities worth above a certain threshold
- asking the independent regulator, the FCA, to put in place a consumer protection framework which could include consulting on a range of extra consumer protections, such as risk warnings and ways for consumers to understand the fair value of their annuities
The government has also responded to consultation feedback and will work with the industry and the FCA to create a simple online tool to help consumers work out an estimated value of their annuity.
The Economic Secretary to the Treasury Harriett Baldwin said:
For most people, sticking with an annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose - the same freedom we gave people approaching retirement in April this year.
That’s why I’m delighted that we’re extending our landmark pension freedoms to over five million people with annuities from April 2017.
People who’ve worked hard and saved hard all their lives should be trusted to make the right decision for them and with the help of the regulator we will ensure these people have the right information to do that.
Minister for Pensions Baroness Altmann said:
The new pension freedom reforms are crucial in allowing people to make the most of their hard-earned savings.
Keeping an annuity will still be the right decision for the majority of people. But some were forced to buy annuities in the past that may not have been suitable for them – and I am delighted that this reform will allow more people greater choice and the opportunity of a more flexible income stream.
For the vast majority of customers, selling an annuity will not be the best decision. However, individuals may want to sell an annuity for instance to provide a lump sum for relatives or dependants; in response to a change in circumstances; or to purchase a more flexible pension income product instead.
- currently people wanting to sell their annuity income to a willing buyer face a 55% tax charge, or up to 70% in some cases. The government will remove this charge, so people are taxed only at their marginal rate
- the government approach outlined in the consultation document fully recognises the contractual agreements between the annuity holder and the annuity provider, and does not unwind those contracts. Instead these changes will allow the annuity-holder to access the value of their annuity where they can find a willing third party buyer. The annuity provider would continue to pay the annuity payments for the lifetime of the annuity holder, but would reassign those payments to the purchaser
- the government intends to allow annuities owned by an individual and held in their own name (rather than by a pension scheme) to be sold. The government has confirmed today that this includes joint annuities and annuities with a guaranteed rate. Existing annuities and annuities purchased in the future will all be in scope
The government will continue to work with the Financial Conduct Authority as they develop appropriate steps to regulate the market. The Financial Conduct Authority will consult in 2016 on their proposed rules around the secondary annuities market.
Requirement to seek financial advice
- through changes to the Bank of England and Financial Services Bill 2016, the Government will require people accessing larger pots to seek financial advice, ensuring that they know what their options are and receive a tailored recommendation
- this legislation will require the FCA to make rules to ensure that certain authorised firms check relevant annuity holders have sought appropriate financial advice before transferring or dealing with their pension annuity payment
- what constitutes a relevant annuity and the threshold – including how it will be calculated and whether it should be set in relation to an individual’s financial circumstances – will be set subsequently by secondary legislation
- the Bank of England and Financial Services Bill also expands Pension Wise, the government pension guidance service, so it can provide free and impartial guidance to anyone thinking of selling their annuities
Image by Images of money on Flickr. Used under creative commons.