In its consultation response to the FCA, the IFoA outlines some potential dangers for consumers of a secondary annuity market, particularly:
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If people underestimate how long they will live, there is a risk that they may not have enough money to last their lifetime, thereby needing to fall back on the State for support.
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IFoA commissioned research found a large mismatch between what people expect to receive from selling their annuity and what they are likely to receive.
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Annuitants are likely to be amongst the most vulnerable in society and may be open to undue influence from unscrupulous sellers.
In order to decrease the likelihood of an annuitant making a decision ill-suited to their circumstances, the IFoA supports the FCA’s overall proposals for advice and guidance when annuitants first show interest in cashing in their annuity. The IFoA encourages the FCA to ensure that the benefits of annuities are widely and clearly communicated as part of the secondary annuity advice and guidance framework.
The need to encourage consumers to get proper financial advice was highlighted in a recent YouGov poll the IFoA commissioned on the secondary annuity market. The poll found the appetite for seeking independent financial advice if selling an annuity was mixed, with 45% indicating that they would not or did not know whether they would take advice.
Any advice process will also need to consider how lump sums should be invested, as well as whether the annuity should be sold on the secondary market. Our poll showed that most annuitants (55%) struggled to say whether they would buy another retirement product, if they were able to sell their annuity.
The IFoA research also highlighted that most annuitants are likely to struggle to place a value on their annuity income and may have unrealistic expectations of the amount they could receive on the secondary annuity market, with over 40% of annuitants expecting to receive a lump sum in excess of 100% of the future annuity payments. Some form of price comparator will therefore be important in letting annuitants understand the value of their annuity income.
Fiona Morrison, Immediate Past President of the IFoA, comments, “Although the freedom to decide how and when to use their retirement assets will be attractive to some pensioners, giving up a guaranteed income could increase the risk of inadequate income in later retirement. If an individual underestimates their future life expectancy and plans the remainder of their retirement income accordingly without a guaranteed pension income, they are likely to run out of savings before they die.
“Many annuitants will likely be amongst the most vulnerable in society, particularly the very elderly and may be open to undue influence from others. In order to protect those most at risk of mis-selling, a robust framework of consumer protections and communications to annuitants must be put in place so they understand the potential risks they may be undertaking by cashing in their annuity.”
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