Jon Greer, pensions technical expert at Old Mutual Wealth, comments:
“In its consultation document the Government is estimating that 6% (300,000) of the five million people who currently have an annuity in payment will look to exchange their regular payment for cash, or another pension product. Their own analysis suggests this could result in a tax windfall of almost £900m in the first two tax years (2017/18 and 2018/19).
“However recent research we undertook with YouGov* suggests this could actually be a significant underestimate, with 17% of respondents indicating that they would be interested in exchanging their annuity for cash. The main reasons given for doing this include wanting to invest the money elsewhere and preference for a cash lump sum over a small annuity payment. This could mean that more than 850,000 people could be looking to sell their annuity which, on the Government’s own estimates could result in around £2bn in tax revenue in the first two years.
“Anyone considering selling their annuity should be reminded that the old adage of “a bird in the hand being worth two in the bush” is not necessarily always true. While a lump sum may look attractive in the short term, annuities have the benefit of being guaranteed income for life and may also contain additional advantages that customers should be aware of before selling. The problem I can see with this market is that buyers are likely to have all the knowledge, and the sellers will have little to none.
“From a purely practical point of view, this whole plan is doomed unless the Government finds a solution to a fundamental point. There is nothing in the document released today that deals with the death of the original annuity holder and how the insurer will ever know. This is key as the insurer will need to know how long to pay the annuity for where it has been assigned/bought. This situation is exacerbated if the annuity has dependants pension too. How will the insurer know if the beneficiary has died, and who is responsible for keeping track. Even if a solution is found this will be a real headache for insurers to administer.”
* Total sample size was 1,557 adults. Fieldwork was undertaken between 22/03/2016 - 29/03/2016. The survey was carried out online. The figures have been weighted and are representative of all UK adults within each of the 5 age groups.