19th March 2015
The Treasury is assuming a tax take of more than £1bn from sales of second hand annuities in the two years after April 2016 when the reform is due to come into effect.
Hargreaves Lansdown says this figure suggests that quarter of a million people will trade in their annuities and then take the money as cash up to 2018.
HL says this estimate is based on 250,000 investors generating £1.075billion tax revenue with all tax levied at the basic rate of 20% and based on the median annuity purchase price which has been around £20,000 in recent years.
Tom McPhail, head of pensions research says: “It is far from certain that this scheme can ever be developed at all, much less that it can raise this kind of revenue for the Treasury without exposing hundreds of thousands of retired investors to a misselling risk. It is widely acknowledged that even if the consultation produces a workable model, it will require robust and potentially expensive safeguards to ensure that investors get a fair price in exchange for their annuity.”
McPhail also questions whether many small annuities of below £10,000 can be sold at all.
“Many existing annuities were purchased with smaller sums. Due to the likely fixed costs of a second hand annuity broking market, it may not be economically viable for smaller annuities (below £10,000 capital value) to be sold at all. Potential purchasers may well want to medically underwrite potential vendors. Vendors may need to pay for regulated financial advice,” he adds.
The news come as the Institute for Fiscal Studies director Paul Johnson suggests that people seeking to sell on their annuity will face an ‘classic adverse selection problem’ and thus might be offered very little money for the contract.
“Who is most likely to want to cash in their annuity? Someone who now knows they don’t have long to live.
“How much will they get for their annuity? Not much. What might annuity companies assume about anyone wanting to cash in? That they have reason to believe they won’t live long. How much will they get paid for their annuity? Not much,” he said.