Buying future instalments means paying a lump sum up-front in return for an income for the rest of the individual’s life. Buyers will legitimately err on the side of caution and assume individuals may die a little before average life expectancy.
This is one reason the amount offered on the secondary market will be lower than what it would cost an individual to buy an annuity, as there, the margin for caution will be to assume the individual lives a little longer than average. Administration and underwriting costs will also reduce the ‘resale value’.
Currently, it is unclear which firms may be interested buyers. For the market to be successful and offer fair value, there needs to be a minimum number of well-regulated firms competing to purchase.
| Key Points |
It is estimated that 6m individuals may be able to sell their annuity annuity – or assign their future instalments to a third-party institution. Annuity income for a given pension sum has fallen dramatically over recent years. Advisers could add value to clients wanting to sell their annuity, but the work may not be attractive to advisers. |
Annuity providers and scheme trustees
Annuity providers will not be forced to allow assignment to a third party, although they will likely come under customer pressure to do so. If they do, they will have to issue risk warnings as soon as the annuitant suggests they are considering assigning.
They will pay future annuity instalments to the third party rather than the annuitant and adjust their records accordingly, advising HMRC and stopping deducting income tax from payments made.
Importantly, the annuity provider will need to find a way of knowing when the annuitant dies so they can stop paying instalments. Currently, they rely on the annuitant’s family or legal representatives informing them, or by seeing a bank account has closed.
But if payments are going to a third party with no ongoing contact with the annuitant, how will the provider find out the original annuitant has died? This is the second key ‘missing piece’, and we have called on the government to share information it obtains around the death of individuals for state benefits purposes.
The government is resisting, citing data protection concerns, but if an individual wants to assign their annuity, surely it is reasonable to require them to give their annuity provider access to such central data.
Where the annuity is legally owned by scheme trustees, they too need to consider whether they are prepared to assign ownership to the scheme member to allow onward assignment.
Trustees are obliged to act in the interest of scheme members so will need to satisfy themselves this creates no issues for the specific member or other members left in the scheme, or opens them up to future liabilities.
