Furthermore, it argues that there is likely to be a significant knock-on effect to newly purchased annuities which could further weaken their value.
Over the last decade, the average private pension pot used to buy an annuity has risen from around £22,000 to £42,000.
People selling annuities will lose value in four main ways based on an average current annuity of £42,000, according to Portal Financial.
- £500 - £1,200 - estimate of the mandatory financial advice charge as announced by the Government;
- £1,500 - £2,600 – 3%-6% the second-hand annuity broker / exchange charge;
- £2,500 - £4,200 - the 6%-10% return that the buyer (investor) would be looking for from any purchase;
- £250 -£1,000 potential administration charge by the annuity provider for costs associated with administration.
However, the introduction of a second hand annuity market could also have broader ramifications which could drive up costs and might further drive down the value of annuities.
As the life insured (including joint lives) no longer has a pecuniary interest in the policy, they will have little interest in notifying the insured of a change in circumstances or, ultimately, death. Therefore insurers may make payments that are not due.
As the policy may be resold (potentially several times) the ultimate owner may be based outside of the UK. This will add to costs for annuity providers.
Taxation is likely to change - individual taxation of the previously insured is relatively simple; however, corporate taxation of the newly insured is likely to be more complex adding to the costs.
Jamie Smith-Thompson, managing director of Portal Financial, commented:
“Creating a secondary market for annuitants wishing to sell their policy has potential advantages for some customers but, as the ultimate financial return that a policyholder will receive is likely to be significantly less than what the policy may have paid out over the full term, it requires careful consideration.
“Buyers will be third-party investors looking for a profit, so they will want to purchase as cheaply as possible. They may consider that a potential seller does not believe they will get the full value of the annuity, in other words that they do not believe they will live a long time, which will worry investors and reduce the sum offered on the secondary market.”
