Reheated annuity sale plans are a recipe for ripped-off savers

Author
Published date
25 Jul 2018
Helping savers get a good deal in retirement is a laudable aim, but reviving flawed plans for a secondary annuity market is not the answer

It would be an unlikely doctor who suggested another serving of undercooked pork after diagnosing food poisoning.

But that’s exactly what’s being proposed in pensions, with the Daily Mail and some MPs backing the reheated idea that people who feel they bought a bad value annuity in the past should be able to sell it on.

Failed once by a market-based system, they seem to believe that people will get a better deal with an extra dose of market.

But plans for a secondary annuity market were cancelled last time due to government concerns that it couldn’t put sufficient consumer protections in place.

Nothing has changed since then, so we think reheating this half-baked idea is a recipe for ripped-off savers.

A bit of background

Annuities are insurance products bought by those with defined contribution pensions to give them an income in retirement.

The introduction of pensions freedom in 2015 was justified in part by the assessment that savers were getting a bad deal when buying annuities.

Firms relied on people not shopping around to sell poor value or inappropriate products.

But plans to let those who have already purchased an annuity sell it on were explored, delayed and eventually rejected by the government due to lack of demand from buyers.

There were also warnings from a range of groups, including the TUC, that it could lead to people being ripped off a second time.

Now the idea has been revived by lobbyist GK Strategy and US firm DRB Capital, which is backed by private equity giant Blackstone.

DRB is keen to push a plan to allow savers sell their annuity income for a fixed period of time – a variation on the previous plans to allow complete sale.

It’s now recruited the big guns of the Daily Mail Money team to run a campaign in favour of this option, and a clutch of MPs have been persuaded to put their names to Parliamentary motion.

Yet the problems that beset proposals to create a secondary annuity market the first time round haven’t gone away.

Weak consumer position

For a start, there’s the question of what constitutes a fair price for an annuity.

For the free market purist this is simply a price that suits both buyer and seller. But it’s well established that the consumer position in the pensions market is especially weak because many savers struggle to understand retirement products.

Often people give excessive weight to the short term and struggle with concepts such as life expectancy and inflation.

Complexity

If you want to sell your home, you can either go online or consult a nosy neighbour to find out how much similar properties in your street sold for.

But it can be much more difficult to understand what an annuity is worth due to factors such as health and contract size.

Many people will lack the money, knowledge or confidence to employ a financial adviser for guidance, especially if they’re selling the annuity due to financial stress.

And knowledge gaps can open both ways – there’s likely to be adverse selection, with those who think their life expectancy is limited most likely to seek a buyer for their annuity.

Rather than put power in the hand of the seller, this could mean prices are discounted to protect purchasers from such bias.

High stakes

There are lots of situations where providers take advantage of a weak consumer position. Think of a walk-on train ticket or the cost of bread in your local corner shop.

But these are relatively small amounts.

If you get a poor deal for your annuity, it could have an enormous impact for the rest of your life.

Then there’s the question of how this would work with the benefits system

Polling by Age UK found few annuity holders want to sell, but that those who do are likely to be poorer.

Would someone who sold their annuity payments be deemed to have deliberately deprived themselves of assets and therefore denied benefit payments? We simply don’t know.

It all adds up to a lot of risk and uncertainty for savers, which is one reason why this half-baked idea was shelved the first time round.

Helping savers get a good deal in retirement is a laudable aim. But reheating these flawed plans is not the answer.