In line with the new UK pension freedoms introduced in April 2015, the Chancellor announced in 2014 that the government would consider introducing changes to pension’s legislation to enable people who have already purchased an annuity in retirement to sell their annuity in exchange for a cash-lump sum. While originally such changes were to be implemented by April 2016, given the complexities involved, it was announced at the end of 2015 that new rules would be delayed until April 2017.
In the government’s response to a consultation on the matter, it was announced 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 streams for an upfront cash sum.
Further details on how the scheme will work were also provided including:
While the government is moving ahead with its proposals, there are still many unanswered questions and technical challenges that will need to be addressed.
Issues include determining at what point an annuitant will be required to seek independent financial advice. Administrative hurdles will push up costs and could impact a nascent market. In addition, the costs for an individual to obtain advice may mean the sale is no longer cost-effective, particularly for smaller policies.
In addition, annuitants will need to understand the pros and cons of selling on their annuity. The Pensions Minister Baroness Ros Altman noted in February that “it is an exciting market, but it may be a niche market. It may be that not many people want to sell their annuities.” As noted by Economic Secretary to the Treasury, Harriett Baldwin “For the vast majority of customers, selling an annuity will not be the best decision.”
In order for the secondary market to work, many critical issues like those noted above will need to be resolved well before the April 2017 implementation date to give insurers and third party market makers time to develop their systems. In order for the market to work properly, there will need to be annuity holders wishing to sell their annuities and purchasers wanting to buy such annuities using a system that efficiently brings both parties together.