Association of Accounting Technicians response to Creating a secondary annuity market 1
Association of Accounting Technicians response to Creating a secondary annuity market 1. Introduction 1.1. The Association of Accounting Technicians (AAT) is pleased to have the opportunity to respond to the HM Treasury and Department of Works and Pensions consultation on Creating a secondary annuity market (condoc). 1.2. AAT is submitting this response on behalf of our membership and from the wider public benefit. 1.3. AAT has added comment in order to add value or highlight aspects that need to be considered further. 1.4. AAT has focussed on the operational elements of the proposals and has provided opinion on the practicalities in implementing the measures outlined. 2. Executive summary 2.1. The condoc is seeking views on a proposal to remove the barriers which currently deter annuity holders from accessing the value of their annuity and suggestions as to how a secondary annuity market should be structured. The proposal aims, by April 2016, to give those with existing annuities greater flexibility, in line with those who will be taking their pension flexibly after April 2015. (1.4, condoc) 2.2. The main reforms outlined in 1.5 (condoc) will be to: Change the tax treatment in relation to annuity holders wishing to realise the value of their annuities. Work with the Financial Conduct Authority (FCA) to ensure appropriate consumer protection is in place for annuity holders as they consider their options. 2.3. AAT s main recommendation contained in 3.3 (below) is for consideration to be given to the establishment of a clearing-house where providers can only tender to assign annuities on the basis of blind bids, which would ensure that annuitants get the best deal. 2.4. In 3.10 (below) AAT notes and agrees with 3.11 (condoc) that assignments to connected parties or registered pension schemes with a small number of members present the biggest tax avoidance opportunities. Therefore, AAT recommends the inclusion of provisions designed to deter such behaviour through tax penalties. 3. AAT response to the consultation paper on Creating a secondary annuity market: call for evidence 3.1. The following paragraphs outline AAT s response to the proposals outlined in the consultation paper. We have only listed those questions where we have a comment to make. Q1) In what circumstances do you think it would be appropriate to assign one s rights to their annuity income? 2
3.2. AAT agrees with the government s view that there are a number of situations where, for a minority of annuity holders, assigning its value could be beneficial. AAT can see where in some circumstances a single substantial lump sum could have more utility than a small amount paid each month over many years such as where the annuitant wants to pay down debt or raise capital for specific purchases. While some might prefer to move the value contained within their annuity into a flexi-access drawdown arrangement so they can, for example, pass it on to their beneficiaries in a tax-efficient way on death. In such circumstances, it could be appropriate to assign one s right to annuity income, provided the mechanism for doing so incorporates powerful consumer education and protection measures. 3.3. While question 1 (condoc) seeks positive reasons in respect of assigning one s rights, AAT is concerned that if a secondary annuity market, without strong consumer education and protection features, was allowed to develop then, at the very worst, it could be to the detriment of the consumer, with disreputable sales-driven organisations targeting vulnerable pensioners with high-pressure marketing techniques. For this reason AAT strongly recommends that consideration should be given for the establishment of a clearing-house where providers can only tender to assign annuities on the basis of blind bids. Such an approach would ensure that otherwise vulnerable-annuitants would get the best deal. Q3) Do you agree that the government should not allow annuity holders to access the value of their annuity by agreeing to terminate their annuity contract with their existing annuity provider ( buy back )? If you think buy back should be permitted, how should the risks set out in Chapter 2 be managed? 3.4. While life insurer solvency is not within our core area of expertise it is AAT s view that it should be down to insurers to make commercial decisions as to whether they want to bid to buy back their own annuity products. It would be for providers to decide whether it was in their interest to buy back an annuity issued by them. 3.5. AAT notes that several major annuity providers have already called for a policy reversal on this issue, to allow them to buy back annuities they have provided 1. Provided the annuity that is the subject of a buy-back arrangement is being put to the market on a blind bidding basis (see also, 3.3, above), AAT does not consider that such an action will lead to increased vendor detriment as a result of allowing the holding provider to bid. 3.6. The adoption of a clearing house approach (see also, 3.3, above) would remove the pressure on providers to make an offer to buy back their own annuity. The provider would be able to purchase it if it wanted to, and the annuity holder would only find out if the original annuity provider was taking the asset after the auction had been completed. 3.7. Furthermore, AAT considers adopting a clearing house approach, with a blind auction, would also remove the risk that some consumers might falsely believe they can only use their new freedoms through their existing provider. Q5) Do you agree with the proposed approach of the government working with the FCA regarding the fees and charges imposed by annuity providers? 3.8. AAT agrees that the issuing annuity provider should not have to bear the costs of reassigning annuity payments to a third party. We do, however, recommend that the FCA should monitor the costs of reassigning to ensure they remain consistent with a functioning secondary annuity market. 1 http://www.moneymarketing.co.uk/providers-urge-govt-to-reverse-annuity-buy-back-ban/ (this site is gated but has a very quick free login for anyone wanting to check the source) 3
Q8) Do you agree that the design of the system outlined in Chapter 3 achieves parity between those who will be able to access their pension flexibly and those who will be able to access their annuity flexibly? 3.9. AAT agrees that the design of the system outlined in 3.3 (condoc) achieves parity between those who will be able to access their pension flexibly and those who will be able to access their annuity flexibly. Q9) How should the government strike an appropriate balance between countering tax avoidance and allowing a market to develop? 3.10. AAT agrees with 3.11 (condoc) that assignments to connected parties or registered pension schemes with a small number of members present the biggest tax avoidance opportunities, as individuals could pass on assets at prices that were either above or below their true market value, with a view to reducing their tax liability. Therefore, AAT recommends the inclusion of provisions designed to deter such behaviour through tax penalties. Tax penalties could be levied, for example where assignments are made to connected parties or registered pension schemes. However, if the Government decides to adopt a clearing house structure then the risk of tax avoidance through assignments to connected parties or registered pension schemes may prove non-existent. It is not clear how big a future secondary annuity market will become, so to enable a new market to flourish AAT recommends that the situation is monitored for a year before considering whether further restrictions are necessary. In the event that it becomes apparent that tax penalties are deemed necessary, these could be fixed at the level of a multiple of the difference between the price actually paid on assignment and the annuity s true market value on assignment. Q10) What consumer safeguards are appropriate is guidance sufficient or is a requirement to seek advice necessary? Should the safeguards vary depending on the value of the annuity? 3.11. A secondary annuity market without proper safeguards creates the potential for significant vendor-detriment. Some may struggle to understand the true value of an annuity especially one that attracts relatively small monthly pay outs, can be worth a significant sum of money. AAT is concerned that vendors may be attracted by cash offers that seem generous but are not market-leading if providers and intermediaries are permitted to target them directly. 3.12. FCA s thematic review of annuities 2 has found that many annuitants have already suffered detriment when buying their annuity. Therefore, AAT considers that for the same persons to lose out a second time when assigning their annuity back to a provider would not only be unfortunate for the individuals concerned, but it would also be corrosive for the reputation of the pensions and long-term savings sector. Strong safeguards are therefore essential, and guidance as a minimum should be obligatory in all cases. 3.13. The establishment of a clearing house where providers can only tender to assign annuities on the basis of blind bids would increase significantly the protection offered to consumers as not only would they get the best deal available to them, but would also make it unattractive for dubious players to enter the market. 3.14. Beyond the security of the sponsoring body, there is little difference in pure financial planning terms between the surrender of a defined benefit pension income for a cash sum and the surrender of an annuity income for cash. AAT believes a proportionate approach would see increased safeguards for secondary market transactions of high value. Therefore, AAT s view is that the same threshold for advice should exist for the surrender of an annuity income as the 30,000 lump sum value threshold that applies to the surrender of defined benefit income. Guidance would be essential for those with 2 https://www.fca.org.uk/news/tr14-02-thematic-review-of-annuities 4
annuities worth less than 30,000, tailored specifically to the needs of individuals selling on their annuity. Q11) What is the best way to implement these safeguards? Should the safeguards include expansion of the remit of Pension Wise? 3.15. As already mentioned (3.3, above), AAT recommends the establishment of an industrywide clearing-house, which could, possibly, be paid for by participating providers and which would be the only route through which providers could tender to have annuities assigned to them, on the basis of blind bids. 3.16. AAT considers that the adoption of the approach outlined immediately above would create an orderly and dynamic market that would lead to a reduced risk of annuitants wishing to assign their annuities being targeted by high-pressure sales operators offering poor value (see also, 3.3, above). 3.17. Furthermore, expanding the remit of Pension Wise to include the assignment of annuity income would ensure that such transactions would be treated in a way that would be considered to be consistent with other retirement-income transactions. Q13) Do you agree that the government should introduce a requirement on individuals to obtain a number of quotes? How else should the government best promote effective competition to ensure consumers obtain a competitive price? 3.18. As already mentioned (3.3, above), the system should require a number of quotes to be sought, through a clearing house-structure. AAT considers that such a structure will best promote vendor-protection to ensure consumers obtain a competitive price. Q14) Does the government s approach sufficiently protect the rights of dependants upon assignment? If not, what further steps should the government take? 3.19. AAT support the government s proposal in 4.21 (condoc) that there be a requirement that dependents written consent should be required before an assignment can take place. 4. Conclusion 4.1. AAT s main recommendation in 3.3 (above) is for consideration to be given for the establishment of a clearing-house where providers can only tender to assign annuities on the basis of blind bids, which would ensure that annuitants get the best deal. 4.2. In 3.10 (above) AAT notes and agrees with 3.11 (condoc) that assignments to connected parties or registered pension schemes with a small number of members present the biggest tax avoidance opportunities. Therefore, AAT recommends the inclusion of provisions designed to deter such behaviour through tax penalties. 5. About AAT 5.1. AAT is a professional accountancy body with over 49,800 full and fellow members and 78,400 3 student and affiliate members worldwide. Of the full and fellow members, there are over 4,100 Members in Practice who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types. 3 Figures correct as at 31 March 2015 5
5.2. AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law. 5.3. Thank you for the opportunity to respond to the consultation on Creating a secondary annuity market: call for evidence. 6. Further information If you have any questions or would like to discuss any of the points in more detail then please contact AAT at: email: consultation@aat.org.uk and aat@palmerco.co.uk telephone: 020 7397 3088 Aleem Islan Association of Accounting Technicians 140 Aldersgate Street London EC1A 4HY 6