The Financial Conduct Authority (FCA) has recently outlined the possible dangers of selling annuities when the secondary market launches in April 2017.Back to results
An annuity is a retirement income bought with pension savings. From April 2017, it will be possible to cash these in for a lump sum. Of the five million people who have an annuity in the UK, it is estimated that 300,000 will exchange these for the cash. Of these each will pay an estimated £3,200 tax when selling their annuity.
The dangers highlighted by the FCA include:
- Running out of money in old age
- Struggling to calculate what a good value is
- Vulnerability to scams
- People with debts being put under pressure
With this in mind the FCA has proposed a set of safeguards aimed at protecting pensioners who choose to cash in their annuity as well as regulate the firms wanting to buy the annuity income.
What are these safeguards?
- Sellers will be required to seek financial advice for annuities worth over a certain value – Ensuring sellers make an informed decision
- Sellers should be made aware of any charges and costs they may have to pay for selling their annuity and the value of it in pounds and pence – Ensuring sellers are made aware of the cost of selling their annuity
- Buyers and brokers will have to present their offer alongside the ‘replacement cost’ of the annuity income if it were to be bought new on the open market – Helping sellers judge the value of their annuity
- Brokers must set out charges up front and agree them with the seller, rather than being paid by commission – Ensuring sellers know all the costs up front
- Firms will have to give sellers specific risk warnings of cashing in their annuity early in the selling process and recommend they seek financial advice or guidance from Pension Wise – Ensuring customers are aware of all potential risks up front
- Annuity buyers must not sell alternative products to sellers during the process - Ensuring that sellers know exactly what to expect when selling and no alternative is presented to them
- Buyers should recommend sellers shop around– Ensuring they are getting the best value when selling their annuity income
- Annuity sales will fall within the scope of the Financial Ombudsman Service and the Financial Services Compensation Scheme – Giving everyone peace of mind.