One careful owner
When the Government first announced its plans to create a market for secondary annuities it rang alarm bells. It was clear from the outset that the Government had no understanding of the annuity market and had given no serious thought as to the challenges that lay ahead, so it is not of any great surprise when they announced on 18 October that they were scrapping the idea.
I have always had three main concerns over the creation of a secondary annuity market and liken it to the car market.
We all know when it comes time to replace our cars there is the inevitable trudge round car dealerships trying to get the best deal possible. We are blessed these days with car villages where a mass of salesrooms from different dealerships are grouped together vying for your business and aim to help take some off the pain out of this torturous task. Unfortunately, the predictions were there would be no such choice for those wishing to cash in their annuity as there was no appetite within the financial services market to participate. The Government has now stated that “it has become clear that creating conditions to allow a competitive market to emerge could not be balanced with sufficient consumer protection”.
So why was there so little interest in generating such a market? Well this brings me on to my second, and perhaps greatest, concern.
Like many individuals, I get a great feeling when I go to pick up my new car. From the unveiling in the showroom, the new car smell and getting to master the hi-tech gadgets that adorn it, but in reality will never get used. If I had my practical head on I should really feel quite depressed knowing that in 3 years’ time it will have lost nearly half its value. Imagine how Joe Public would feel. He has listened to his financial adviser, perused the glossy brochures and picked his annuity. It may not give the same elation as buying a new car, but contentment, safe in the knowledge he has secured an income for life. Three years later, finding life on a pension somewhat duller than he hoped, he is suddenly given the option to cash in his annuity. How disappointed will he be when he finds out what someone is prepared to pay for it? Even if we ignore that it may be a limited market whoever purchases the annuity will have significant costs, the main one being underwriting their risk. By comparison, the loss on a car may not look so bad after all.
Finally, the secondary annuity market would have been a fraudster’s dream ticket. Like the nice salesman who cold called from ‘Honest Joe’s Second Hand Car Sales’ who assured you rather than trade in you car let them sell it on your behalf. They will only take a minor commission when the car is sold, guaranteeing you a better return. They would even arrange to pick up the car and registration documents. Just too good to be true!
There may be a few disappointed holders of annuities who were gearing up for the big cash giveaway but I am sure there is a big sigh of relief throughout the financial services industry.
This blog first appeared in Professional Adviser in 2016