Secondary market for annuities: more detail on the government's proposals

In March 2015, the government opened a consultation on creating a secondary market for annuities. It recognised that, for most people who had bought an annuity, the best option would be to keep it and the regular guaranteed income it provides. However, it was conscious that defined contribution (DC) savers who retired before the 2015 pension freedom changes took effect may have had little choice but to purchase an annuity. A secondary annuity market would give these people the option to swap their annuity for a taxable lump sum or more flexible source of income. The option could also be useful for DC savers who retired after the pension freedom changes, but did not have access to all of the freedoms or whose personal circumstances have changed. 

This is a difficult area and, in the July 2015 Budget, the Chancellor announced that the implementation of a secondary annuity market would be delayed until 2017 in order to ensure there was a strong framework to support annuitants in making their decision. 

The government has now published more detail about the secondary market and the protections. This detail is in its response to the March consultation, which was published today. The key points are as follows: 

• The government remains committed to introducing a secondary annuity market by April 2017.
• It is still of the view that, for most people, the right decision will be to keep their annuity.
• The secondary market is just intended to provide choice for people who have already bought an annuity, or who buy one in the future.
• Where the annuity is worth more than a certain amount (to be confirmed), there will be a legal requirement to take financial advice.
• Pension Wise will be expanded to ensure that everyone considering this option has access to guidance.
• To try to protect people who do not take financial advice or use Pension Wise, there will be a ‘second line of defence’ warnings before the sale.
• The UK purchasers of annuities will have to be Financial Conduct Authority-regulated and the FCA is going to consult on rule changes for new regulated activities.
• To help people to understand the value of their annuity and encourage competitive pricing, the government and the FCA will develop an online tool which will give the individual an indication of the value their annuity should have.
• The FCA has been asked to consider protection for dependants where annuities are joint life. Dependants will also have access to Pension Wise. 

Implementation of this market for annuities will require a number of amendments to existing legislation as well as new legislation. We will see various consultations and pieces of regulation designed to enable the new market coming out in 2016. 

We note the similarity between these safeguards and the ones that were put in place, earlier this year, for members who wish to transfer pension benefits from a defined benefit to a DC scheme in order to access the 2015 pension freedoms. With freedom comes a need for understanding and the aim has to be to support members in making a fully informed decision.