Out-Law News 3 min. read

Final salary schemes to be included in secondary annuity market


Annuity holders who purchased their policy with funds from a final salary pension scheme will be able to sell it through the planned secondary annuity market, the government has confirmed. 

HM Revenue and Customs (HMRC) is now consulting on new tax rules which will apply once the marketplace is up and running, expected in April 2017. It follows last year's Treasury consultation on a proposed policy framework for the new marketplace, which is being created to give those who "had little choice" but to purchase an annuity with the proceeds of their pension pot access to the same flexibilities introduced for new pensioners in April 2015.

Separately, the Financial Conduct Authority (FCA) has published its proposed rules and guidance for the secondary annuity market for consultation. Firms will be required to give those considering selling their annuity specific risk warnings "at the earliest opportunity", and to recommend that they seek regulated financial advice or guidance from Pension Wise even in circumstances where this will not be a legal requirement.

HMRC's consultation will close on 15 June, while the FCA's consultation will close on 21 June.

Pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that extending the secondary annuity market to cover final salary schemes was a "significant" change from the original proposals.

"Final salary trustees were already facing challenges around members wanting to access the pension freedoms by transferring to defined contribution (DC) schemes," he said. "Now trustees will have additional headaches deciding whether to assign to members any annuities that they hold, so that members can sell those annuities."

"By refusing, trustees will be accused of denying access to the pension freedoms; by agreeing, trustees might be seen as encouraging members to make poor financial decisions. In our experience, trustees take their jobs very seriously and will need carefully to weigh up these competing pressures," he said.

As previously announced, the government intends to remove current tax constraints preventing annuity holders from assigning their right to regular payments under the policy in exchange for a cash sum, which can either be taken as a cash lump sum or used to purchase a flexible annuity or drawdown product. It does not intend to allow annuity holders to unwind their contractual arrangements with the annuity provider.

The new right will be available to those holding rights to an annuity that was purchased with sums or assets from a registered pension scheme, including those with 'deferred' annuities that have not yet come into payment. This will theoretically include members of final salary schemes who are the beneficiaries of annuities purchased by the trustees of the scheme for that purpose, provided that the trustee agreed to assign the annuity into the scheme member's own name.

Once the secondary annuity market is up and running, anyone buying or buying back annuity incomes or acting as a market intermediary will have to be regulated by the FCA. Intermediaries would set up 'portals' to connect potential sellers and buyers, and buyers would base the amount that they offer on the value of the future income they expect to receive through the policy, subject to further underwriting. Policyholders will not be entitled to sell their annuities to connected persons or companies, the scheme sponsoring employer or for purposes related to tax avoidance, according to HMRC's consultation.

Policyholders would be pointed towards regulated financial advice or guidance from Pension Wise, which will be extended in scope to cover the secondary annuity market, according to the FCA consultation. Brokers would be required to set out their charges up front and agree them with the consumer selling their annuity, rather than being paid commission from purchasing firms. Buyers or brokers making an offer for an annuity would be required to present their offer alongside the 'replacement cost' of the annuity income if it was to be bought new on the open market, and annuity sales would fall within the scope of both the Financial Ombudsman Service and the Financial Services Compensation Scheme, the FCA said.

Pension experts at Pinsent Masons said that the new rules had the potential to offer trustees and sponsoring employers new ways to restructure their pension liabilities.

"This is a great opportunity for providers to drive innovation around member options and pricing in their bulk purchase annuity propositions together with the wider facilitation of access to their drawdown platforms," said Robert Lawrence.

"If trustees of defined benefit pension arrangements are concerned about securing members' benefits by way of a bulk purchase annuity and then seeing large numbers of those members seeking to surrender or cash-in their individual annuities, then the secondary annuity market may conversely encourage trustees to consider how best they can help members understand the options available to them prior to buy-out - including full transfers to DC schemes," he said.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.