UK government cancels plan to create a secondary annuity market

Although "many firms" had said that they were willing to allow their customers to sell annuities, not enough had expressed an interest in purchasing the policies, the government said.

"While exploring this further, it has become clear that the steps that the government would need to take to create purchasing demand in the market would undermine other consumer protections," the Treasury said in a statement.

George Osborne, then chancellor of the exchequer, announced plans to create a secondary market for annuity sales in March 2015. The policy was aimed at people who had retired before 6 April 2015, when defined contribution (DC) pension scheme members were given more flexibility over how to access their savings without having to purchase a traditional annuity or incurring heavy tax penalties.

Pensions and lifetime savings expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that consumer protection issues were the biggest barrier to the creation of a secondary annuity market due to the "information asymmetry" between annuities specialists on the buy side, and consumers on the other. This "creates the risk of mis-selling, which could have backfired on the government's reputation", he said.

"A shame, some will say," he said. "Annuities are a good product. However, a barrier to buying an annuity is the perception that you are handing your money over and can't get it back. It's a once-and-for-all decision. The secondary annuity market would have removed that barrier, making annuities seem more attractive. Consumers would have known that in times of hardship they could, if necessary, cash in their annuity."

"We might yet see the emergence of a DIY market. It might be possible to structure new annuities in a way that they can be sold on, without jeopardising the tax status. A DIY market would be risky, but at least annuitants could start enjoying the much-heralded pension freedoms," he said.

An annuity is a policy from an insurance company that converts a pension fund, or part of a pension fund, into regular pension income. The government had planned to remove tax restrictions on the sale of annuities to third parties from 6 April 2017, allowing the policyholder to sell the right to the income that they would have received under the policy without unwinding the original annuity contract.

The government had intended for consumers wishing to sell annuities to have a right to free and impartial guidance from the Pension Wise service, and to introduce a requirement for the policyholder to seek independent financial advice if the annuity was worth more than a certain amount. It had expected only around 5% of current holders of annuities to take advantage of the reforms, as retaining the right to a guaranteed income for life would be the "best option" for the majority of policyholders.

Simon Kirby, the Treasury's economic secretary, said in a statement that it had become "increasingly clear that creating the conditions to allow a vibrant and competitive market to emerge, with multiple buyers and sellers of annuities, could not be balanced with sufficient consumer protections". The government had discussed the issue "extensively" with financial regulators, consumer groups and the pensions and insurance industries, he said.

"Allowing consumers to sell on their annuity income was always dependent on balancing the creation of an effective market with making sure consumers are properly protected," he said.

"It has become clear that we cannot guarantee consumers will get good value for money in a market that is likely to be small and limited. Pursuing the policy in these circumstances would put consumers at risk - this is something that I am not prepared to do," he said.