Creating a secondary annuity market

February 5, 2016

The Department for Work and Pensions (DWP) has responded to the consultation issued early last year.  It plans to implement a secondary market for annuity holders to sell their annuity to a third party, with effect from 6 April 2017.  The DWP acknowledges in the paper that retaining their annuity will be the most suitable choice for most people but still plans to press ahead with its proposals.

Annuities in scope will be:

  • those arising from defined contribution arrangements and
  • those purchased from a defined benefit scheme and assigned to the individual member but not
  • those purchased from a defined benefit scheme in the name of the trustees, which constitute scheme assets.

Restrictions on purchasers

It is proposed that purchasing rights under an annuity on the secondary market be a regulated activity, so firms participating in the secondary market will have to be regulated by the Financial Conduct Authority (FCA).

Having considered arguments for and against allowing an annuity provider to buy back its own annuities, the Government plans to legislate to make such buying back a further regulated activity.  Annuity providers will need to hold this permission in order to buy back their annuities through a regulated intermediary.  However, providers may be able to buy back annuities directly where the value of the annuity is below a certain threshold (yet to be determined).

Retail investors will not be allowed to purchase second-hand annuities, as pricing will be complex and the product illiquid.

The Government proposes that partial assignment or surrender of an annuity will constitute an “unauthorised payment” and be taxed accordingly.  However, it will monitor the development of the new market and may remove these tax charges in the future if it considers it appropriate.

Consumer protection

It is proposed that individuals who want to sell an annuity whose value is above a certain level be required to seek advice before proceeding with the sale.  Regulations will prescribe who will be required to take financial advice.  The remit of Pension Wise will be extended so that they can provide guidance for those with lower-value annuities, including on any potential effect on entitlement to means-tested benefits.

Next steps

The Government intends to consult on the detail of the tax framework in Spring 2016.  The FCA intends to consult during 2016 on draft rules in relation to the secondary market for annuities.

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