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Budget 2015: UK government sets out plans for 'secondary market' allowing annuities to be sold on


Pensioners planning to sell on the right to regular annuity payments to a third party could be required to seek independent financial advice before doing so, under plans put forward by the UK government.

A consultation paper published alongside this year's Budget sets out further details of the government's intention to establish a 'secondary' market for annuity sales, giving over five million existing pensioners the same right to access their pensions flexibly as will be extended to those reaching retirement from next month. The consultation, which closes on 18 June, sets out further details of how payments could be taxed under the new regime, as well as of the consumer protection mechanisms that could be put in place.

"While those retiring after 6 April 2015 will benefit from these reforms, those who retired before then and bought an annuity with funds from their defined contribution pension scheme remain effectively 'locked' into that choice through a tax charge of up to 55% (or 70% in some cases if they were to reassign their annuity," the Treasury said in its consultation paper.

"For the vast majority of people, continuing with their existing annuity will be the right choice. Annuities provide a regular guaranteed income for life and many people will continue to value the security they provide. However, there is no reason why the government should impose barriers that prevent individuals from being free to make their own choice about what to do with their annuity rights, purchased with money they have saved throughout their working life," it said.

An annuity is a policy from an insurance company that converts a pension fund, or part of a pension fund, into a regular pension income. As announced this week, the government plans to remove existing restrictions on buying and selling annuities from April 2016, allowing the annuity holder to sell the right to the income that they receive without unwinding the original annuity contract. The annuity holder would receive a cash sum, which they would be able to take as a lump sum or place into a drawdown product, while the provider would continue to make regular annuity payments to the purchaser.

According to the consultation paper, the "preferred approach" of the UK government is to remove barriers to the creation of a secondary market and allow annuity providers and potential buyers to develop the market, rather than to "dictate a rigid mechanism". It would do so by removing the punitive 'unauthorised payment' tax charge preventing individuals from assigning their annuities, and instead taxing individuals at their marginal rate. It would also work with the Financial Conduct Authority (FCA) to ensure that "appropriate consumer protection" was put in place.

Only annuities in the name of the annuity holder and held outside an occupational pension scheme would come within the scope of the proposed new freedoms, according to the consultation paper. For joint annuities, it would be for the provider to decide whether to go ahead and with what confirmation from the secondary beneficiary. Annuity providers would be able to block sales, as the government has no intention of "interfering" with existing contractual agreements, it said.

The consultation confirmed that the government does not intend to allow annuity providers to "buy back" contracts they have entered into with the customers, due to the risks of providers coming under "significant public pressure" to do so with potential repercussions to their solvency. However, it said that it welcomed views on "the potential risks and benefits" of allowing buy back, as it acknowledged that existing providers could be in a position to offer a better price to the consumer than other purchasers.

Possible consumer protection measures could include a requirement for the annuity holder to take regulated advice before selling, similar to the existing requirement that applies to transferring savings from a defined benefit from a defined contribution scheme. The government said that although this advice could be expensive, "recent clarification" by the FCA of rules around simplified advice could potentially create a new type of advice product. It could also expand the remit of the government-backed Pension Wise independent guidance service to cover annuity re-sales, or including appropriate risk warnings in the information that providers are required to give savers.

Proceeds from the sale of annuities that were taken as cash would be subject to income tax at the marginal rate, while proceeds used to buy flexi-access drawdown funds or flexible annuities would not be subject to income tax on transfer. Instead, income from these products would be taxed at the marginal rate. The £10,000 annual allowance and new tax treatment of annuities on death would apply to those assigning their annuity to a third party, according to the consultation.

The risk that annuity providers will not know when to stop payments to a third party buyer on the annuity holder's death would have to be addressed, although the government said that it was not inclined to establish a central 'death register' to help with this due to the disproportionate costs of this. The FCA would also be expected to monitor charges imposed by annuity providers to ensure that they were not exploiting customers that wished to sell on their annuities, according to the consultation.

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