Whether you think it’s a ‘good thing’ or not, the second-hand annuity market will become a reality in only ten months’ time.
At the moment, it’s all hands to the consultation pump, as we have four (yes, count ‘em, four) consultations doing the rounds, as HMRC, the Treasury, FCA and PRA figure out just how this market will work.
It’s fair to say almost everyone is approaching this market with trepidation – with HMRC and the Treasury voicing their concerns selling an annuity won’t be in the best interests for most people, and FCA saying it will be a difficult market to regulate.
Which really just begs the question, why are doing this at all?
But let’s just park that thought for the moment, and delve into how it will work.
A customer decides they want to sell their annuity. It’s up to the annuity provider to agree to this, and to make sure the customer can legally sell the annuity (some won’t be allowed to). It’s conceivable some companies may not allow annuities to be resold, although that decision would damage their reputation. But if the holding company says yes, then the customer can approach a bureau set up to sell the annuity on their behalf. In theory, there can be more than one bureau, vying for the customer’s business. After all this is a private enterprise, not a government-sponsored organisation. In practice, it will be interesting to see who decides to take on this role. Organisations who have established data feeds with existing providers are perhaps more likely to be involved, but there may also be new players.
The bureau collects all the necessary information, including the health details for the individual, which may mean over the phone or a GP report. It will depend on the customer. This is of course vital – the price offered will depend on how long someone can be expected to live, and how many instalments the buyer receives. The bureau then relays this information to the buying companies, and they decide whether - and what - they want to bid. The customer considers all the bids and decides which one to take – presumably the highest.
Then there is a lot of legal work assigning policies and also collecting and paying money. And if there is a dependant involved, then their consent as well as the annuitant’s may be needed.
So, what about the costs? Well, the bureau will make a charge obviously. They have to cover the costs of data and money exchange as well as the bill to gather the medical information about the customer. They will also want to cover the cost of building this new infrastructure.
The holding annuity company will also make a charge. They have the administration costs of providing data, as well as the legal and administration costs involved in changing the recipient of the policy. And the buying company will also have costs. They have capital expenditure, administration costs involved in making a bid, and the costs to cover the risk of taking on the business.
All of these costs will somehow be extracted from the amount of money offered to the customer in exchange for their annuity. Add to that the more explicit costs of an adviser, if the customer has to seek advice. (At the moment, we know customers with annuity pots worth more than a certain value will have to seek advice before they can sell their annuity. But the FCA has yet to tell us what that value is, and whether it will be measured by the size of the pot or by the size of the income stream.)
Once the customer receives their lump sum in return for their annuity, they have a few options. They can take it as cash – and if they do then it will be taxed as income in their hands, possibly pushing them into a higher tax bracket. Another cost. Or they can set up a drawdown plan and take the money gradually, which may get around a high tax bill, but may also incur other costs in setting up a drawdown plan. (They can’t add the lump sum to existing drawdown arrangement.)
So, once you unpack this process you realise there are a lot of fingers in this pie, and the customer might not get back very much at all. But there will be customers wanting to sell. Those who have a small income stream now, and for whom a lump sum will be worth so much more. Or those who have set up annuity policies for dependants and whose personal circumstances have now changed.
I imagine a burst of activity in the first two years – as does HMRC who reckon 300,000 people will sell their annuities (although how it comes by this number remains a mystery – perhaps a finger in the air?). Whether business will continue at this level is unlikely. And this possible lack of market longevity is important to those companies considering the bureau role or whether to become buyers. It’s not necessarily a done deal there will be hordes of companies lining up to buy annuities – especially given the PRA’s initial view about Solvency II treatment.
It’s going to be a busy ten months for the industry, getting the infrastructure in place to serve a market that will burn for maybe a couple of years, before dying out again. A mayfly of a market. And one, that probably won’t be in the best financial interests of most people.