Osborne's latest policy

BobQ

http://www.bbc.co.uk/news/uk-31892518

Osborne's statement this morning.......

He is set to allow up to five million existing pensioners to swap their fixed annual payments for cash.

I can see that those with a pension pot can buy the best annuity by shopping around. But how will this work when the annuity provider is asked to provide a cash sum to end the annuity? Surely they have no incentive to offer a good deal? Or does this involve selling the annuity to a third party?

bmm78

BobQ wrote: »

http://www.bbc.co.uk/news/uk-31892518

Osborne's statement this morning.......



I can see that those with a pension pot can buy the best annuity by shopping around. But how will this work when the annuity provider is asked to provide a cash sum to end the annuity? Surely they have no incentive to offer a good deal? Or does this involve selling the annuity to a third party?

The details that we have from the Treasury suggests that the annuitant will be able to sell the income stream onto a third party. They appear to be moving away from the idea of the original provider commuting the existing income for a single lump sum payment.

The income would be paid to the third party rather than to the annuitant, but the existing contract would otherwise remain intact.

They have also dismissed the option for a private investor to purchase the annuity. It appears that it would have to be a financial institution, and likely to fall under FCA regulation.

Leaving aside whether it would be commercially attractive to individuals to do this, there are a lot of unanswered questions and a thorough consultation will be needed to put this into force. They won't be able to just fast-track this set of reforms through.

Based on the fact that a secondary transaction introduces another layer of profit margin (to the firm buying the annuity), another layer of distribution (intermediaries sourcing the best deal), and the negative tax consequences (unless placed into drawdown), it is very difficult to see how many people can benefit from this.

The happiest people will be the scammers, who will be like pigs in the proverbial if they can get stuck into 5m policy holders in a highly vulnerable demographic who may well have made a less than informed decision first time round (it's likely to appeal more to those who bought an annuity through ignorance rather than because they saw it as the best option).

Dunnit

It would be difficult to set up a second hand market for annuities. If the third party does not know the health of the original purchaser then it would be difficult to value an annuity.
As for buying the annuities back I am sure the annuity companies will make a profit on the way in and the way out.

BobQ

Dunnit wrote: »

It would be difficult to set up a second hand market for annuities. If the third party does not know the health of the original purchaser then it would be difficult to value an annuity.
.

The third party would effectively be gambling on how long they thought the annuitant would live. Could this lead to a mis-selling scandal I wonder.

bmm78

BobQ wrote: »

The third party would effectively be gambling on how long they thought the annuitant would live. Could this lead to a mis-selling scandal I wonder.

"Could this lead to anything but a mis-selling scandal?" is probably the more pertinent question

With regards to gambling on how long the annuitant lives, they would presumably want to take into account their state of health. Again, these are costs that will need to be covered and will reduce the potential payout.

jamesd

Speculation on how long someone else may live isn't particularly unusual, with the French having the viager system where a person can commit to paying a lump sum and regular income in exchange for receiving a property on death of the annuitant. Alternatively there's the "viager libre" where the annuitant has to leave the property rather than staying in it.

The FT had a story suggesting that the price might be 80% of the anticipated value of the annuity. That doesn't initially seem compelling until you remember that the person could use the money to defer the state pension. For those reasonably close to state pension age that Could be a profitable move because deferring pays out much more than normal annuities do. Even the loss from selling wouldn't usually be enough to make it a bad move.

The scandal here may be what happens when those who attempt to sell their annuity find that they are offered very low rates because they were sold a standard annuity when they were entitled to an enhanced one. That will make their loss from the wrong annuity type crystal clear to them and also identify the magnitude of their loss, so I think we'll end up seeing widespread ad campaigns for mis-selling complaints firms.

DaveMcG

Idiotic idea.

As other have pointed out the annuitant can't possibly get anything like the correct value.

So this is a change that will only cause detriment. I can't see how the FCA will do anything other than refuse to sanction it.

Osborne probably knows this but hopes no one will notice till after the election.

xylophone

http://www.frenchpropertylinks.com/essential/viager.html

Speculation on how long someone else may live isn't particularly unusual, with the French having the viager system where a person can commit to paying a lump sum and regular income in exchange for receiving a property on death of the annuitant

"Even with quite elderly people, lifespan is not easy to accurately predict. Clearly, buying a Viager property from a person in his or her late 80s would seem to guarantee that there will be a limited period before the property passes to the buyer, however this "limited" period can be rather elastic, perhaps especially in the south of France, where there are a higher than average number of elderly people living to very ripe old ages! Should the seller, as has been known, live well past the age of 100, the rental payments can negate the original advantages."

http://en.wikipedia.org/wiki/Jeanne_Calment

jamesd

Yes, I was familiar with the case. Mr Andre-Francois Raffrey ended up paying her a Viager annuity until his death, in a deal made when she was 90. He died 30 years later at 77 and his wife and their children remained committed to paying her annuity until she died. This does illustrate a practical difficulty for this particular type of deal because the value of the property and annuity makes it hard for most individuals to diversify.

kidmugsy

jamesd wrote: »

This does illustrate a practical difficulty for this particular type of deal because the value of the property and annuity makes it hard for most individuals to diversify.

It would be a pretty mad gamble to buy one such annuity; you'd want to get the advantage of averaging over many. I wonder how the annuity will be taxed in the hands of the new owner. Could someone set up an Investment Trust and devise a way of holding it in an ISA so that the annuity income is distributed tax-free?

System

BobQ wrote: »

The third party would effectively be gambling on how long they thought the annuitant would live. Could this lead to a mis-selling scandal I wonder.

The third party could presumably take out life insurance on the annuitant, as now having an insurable interest?