George Osborne's £1bn pensions misselling risk

George Osborne has incredibly ambitious plans for the annuity re-sale market - and how much money he intends to make from it. The projections he published with the Budget show that he expects to rake in £1 billion in the first two years alone. However, the experts warn that this isn't just a hugely ambitious timescale for starting a whole new second-hand annuities market - but it also exposes hundreds of thousands of retirees to a misselling risk.

In the Budget, Osborne announced plans to let pensioners sell back their annuities for a cash lump sum. They will no longer be exposed to the old rules, which would charge them 55% tax on the cash: instead they will pay tax at their marginal rate. It's this tax that he expects to come to a total of £1.075 billion between 2016 and 2018.

Tom McPhail, Head of Pensions Research at Hargreaves Lansdown points out that his assumes a workable second-hand market can be established. He says: "There are significant practical obstacles to overcome before this option will be available." "It is far from certain that this scheme can ever be developed at all."
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Concerns

The experts highlight that in order to sell your annuity, someone would need to buy it, and this creates a fundamental problem. Steve Wilkie, managing director of retirement specialists Responsible Life, said: "On the surface, it looks like an escape route out of low-value annuities." "Unfortunately, this is an escape route fraught with danger and booby traps." "Someone has to be wiling to buy the annuity, and any institutional investor is going to expect to make a profit. That means they're unlikely to buy the annuity at a fair market value, and the loser is ultimately going to be the pensioner who needs the money the most."

Neil Lovatt, Director at Scottish Friendly, added: "New systems will need to be built, underwriting undertaken on individual lives, advice sought and paid for and you can guarantee that there will be a large amount of costly compliance and regulation layered on to the change. None of this comes cheap, and the cost will need to be factored into the pricing. It's those that are taking advantage of the new freedoms that will need to bear the brunt of those costs."

As a result, McPhail says that for most people selling their annuity is not going to prove an attractive option, saying: "In most cases we would expect the guaranteed income an annuity provides to have a greater lifetime value than a cash payment now."

Misselling

Given that the experts believe the second hand market would only benefit a small minority, McPhail warns that it opens up a huge misselling risk. He is concerned that according to his calculations, if the government expects to make £1 billion in tax (assuming they are cashing in an average annuity of £20,000 and they pay basic rate tax) it would mean 250,000 investors are expected to sell their annuity in the first two years. This does not tally with the views of the experts that the vast majority of people will not be well served by the move.

McPhail says the only way to avoid people making poor decisions is to establish a system with "Robust and potentially expensive safeguards, to ensure that investors get a fair price in exchange for their annuity." However, he doesn't have any confidence that such a robust system will be established in time to protect annuitants.

He says: "For 13 years the Treasury and DWP have tried and failed to create a 'shopping-around' system which serves investors well when they first buy an annuity; it is quite a leap of faith to expect them to achieve this now in the space of just one year for a market which doesn't even exist yet."

But what do you think? Do you plan to sell your annuity? Do you have any concerns? Let us know in the comments.

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