Pensioners face risks selling annuities, says FCA
Significant risks face those who decide to sell a retirement income - such as running out of money in old age, the City watchdog has said.
A market for people to sell their annuity will be launched in April 2017, meaning pensioners can exchange their set retirement income for a lump sum.
The government estimates that 300,000 people will cash in their products.
Now the Financial Conduct Authority (FCA) has outlined the dangers that could result from selling up.
Concerns include individuals struggling to calculate what a good value for their annuity might be, vulnerability to scams, and people with debts being put under pressure to sell their annuity to settle the bill.
An estimated five million people in the UK have an annuity - a retirement income bought with pension savings.
As an extension to the pension reforms allowing people to cash in their pension pot before retirement, people who have already bought an income for life with their pension pots will be able to reverse that deal.
Currently, it is possible to sell an annuity, but a tax charge of between 55% and 70% makes it an impractical option for most people.
From April 2017, individuals who receive a lump sum from selling their annuity will only pay tax at their highest marginal income tax rate.
The Treasury is expecting a tax windfall of £960m over the first two years of the scheme, owing to the tax collection of an estimated £3,200 per annuity seller.
The FCA has now warned that "there is a significant risk of poor outcomes" for consumers selling their annuities.
Christopher Woolard, director of strategy and competition at the FCA, said: "We recognise that some consumers may be particularly vulnerable.
"We have set out proposed rules and guidance that will help ensure that consumers have an appropriate degree of protection should they decide to sell their annuity income."
Those proposals include:
- A requirement for sellers to seek financial advice for annuities over a certain value
- An extension to the government-backed, free Pensions Advisory Service
- Sellers to be given specific warnings of the risks early in the selling process
- Consent to be gained by a broker from anyone else who would benefit from the annuity, such as a spouse, before it is sold
- Brokers and advisers to set out their charges upfront to customers
- A 14-day cancellation period and access to the Financial Ombudsman if sellers are unhappy
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: "This is a complex market to create from scratch; however, we know that many annuity holders will be interested in trading in their income for a lump sum.
"The FCA has come up with a good package of measures to try and protect investors, while also giving them the freedom to manage their own money."
Others are more sceptical.
"There are a number of missing pieces to make this brand new market work efficiently," said Steven Cameron, pensions director at Aegon.
"There is no central point for consumers to offer up their annuity to a range of buyers, with consumers instead being encouraged to approach each buyer separately to get the best deal.
"Each potential buyer may demand their own medical evidence which will be timely and costly."
The Association of British Insurers said there was a number of issues to work through in "limited" time before April 2017.