The UK government says it is giving up on its plan to create a market for secondary annuities because it has concluded the consumer protection required could undermine the new market’s development.
The shelving of the plan, which would have allowed people who have already turned their pension pot into a retirement income to benefit from the new pension “freedoms” brought in in the 2014 Budget, has been widely welcomed by pensions and investment providers, but former pensions minister Ros Altmann said thousands of people would feel let down by the decision.
Simon Kirby, the economic secretary to the Treasury, said: “Allowing consumers to sell on their annuity income was always dependent on balancing the creation of an effective market with making sure consumers are properly protected.”
It has become clear that the Treasury could not guarantee consumers would get good value for money in a market that was likely to be small and limited, he said.
“Pursuing this policy in these circumstances would put consumers at risk – this is something I am not prepared to do,” Kirby said.
The government had always been clear, he said, that the best option for most people was to keep their annuity incomes.
He estimated that only 5% of people who now have an annuity would take advantage of the reform.
David Fairs, pensions partner at KPMG UK, said his firm welcomed the decision, even though scrapping the secondary annuity market was bad news for those people who had been effectively forced into buying an annuity before the freedom and choice measures came along.
“If the government had gone ahead with the secondary annuity market, then many consumers would likely have missed out on getting a fair deal due to a reluctance, or inability, to pay for the professional advice many of us need,” Fairs said.
David Newman, head of pensions at Close Brothers Asset Management, said a secondary annuity market could potentially have been “the next big mis-selling timebomb” given the sheer scale of consumer protection issues it would generate.
“Ultimately, this about-turn from the government means less flexibility for the small minority that would have benefited from the ability to sell their annuities, but, given the level of education and advice that would be required to make the launch possible, common sense has prevailed,” he said.
“While we will never know, there is also the suspicion that, in practice, the amount people would have actually received for selling their annuity would have been well below their perceived expectations.”
However, Altmann said the decision would bring major disappointment to thousands of people.
“Many have been waiting anxiously for the opportunity to undo the annuity they were forced to buy and will feel let down by the announcement that the secondary annuity market is being scrapped,” she said.
She said many people would now be stuck for the rest of their lives with an annuity they never wanted.
“This was never likely to be a huge market, but, for some individuals, it would have been a potential lifesaver,” she added.
Altmann said people who had bought an annuity because they were forced to do so by law had been waiting for a chance to sell it, but now that opportunity was being taken away.
She said it was vital that consumer protection be in place to help people understand the value for money they would have been offered.
But that understanding was previously going to offered by financial advisers and Pension Wise, she said.
“The government’s most recently announced overhaul of financial guidance has made the Pension Wise route impossible because the whole guidance landscape is now up in the air,” she said.
But Steven Cameron, pensions director at Aegon, said all the signs were that the secondary annuity market would have been “a pension freedom too far”.
“Giving up a guaranteed income for life is a huge decision and not the right one for the vast majority,” he said, adding that the risks and complexities for the many far outweighed any possible benefits for the few.