However, Steve Webb, the minister of state for pensions, has since thrown a half-baked idea into the pensions reform pot. He wants people who have already bought an annuity - and who can't benefit from the pensions reforms coming in from April - to be able to sell their annuity in exchange for a lump sum. But how is this going to work in practice?
Tom McPhail, head of pensions research at Hargreaves Lansdown, says: "Individuals are not going to buy second-hand annuities off other individuals; generally speaking they don't have the actuarial and longevity assessment skills necessary to undertake such a transaction. You could use a competitive market to 'bid' for the income streams. However, no such market exists today and there is no obvious incentive to set one up."
The simplest solution would be that the annuity holder and the insurance company agree to cancel the contract, annuity payments cease and the investor is paid a lump sum by their annuity provider. However, this depends upon the annuity company and the investor both being able to agree a fair price for the cancellation, subject to full medical examination of the annuitant to assess life expectancy. The costs for the annuity holder are likely to be prohibitive, unless they have a very valuable annuity contract.
Another problem is that the insurer could find that all the investors in poor health would try to cash in their annuities and they'd be left with only the healthy long-lived investors. That's bad for the solvency of the insurer, meaning insurers are likely to be very conservative regarding the lump sum they will offer to release you from your annuity. Investors, on the other hand, tend to underestimate their life-expectancy so would probably over-value an upfront lump sum.
A more complex solution would work similarly to 'life settlement' investment schemes which involve the sale of second hand insurance policies. The annuity income stream continues but the annuity holder sells it to a third party in exchange for a lump sum.
Life settlement schemes - their less appealing moniker is 'death futures' - are popular in America but never took off in the UK. The few schemes which were launched here failed to get off the ground because the majority of life assurance sold in the UK is term assurance - death benefits are only payable during a defined period rather than for your whole life.
Purchasers of the second-hand annuities would probably look to buy a portfolio of investments rather than a single transaction (to spread risk); this would therefore require the establishment of pooled funds for these contracts.
However, the UK pooled funds that invested in American life settlements were labelled in 2011 by the Financial Services Authority as 'high risk, toxic products'. This had dire consequences for investors in the EEA Life Settlements Fund, which had become very popular with investors during the 2008-09 credit crunch crisis for its regular high income and diversification characteristics.
Based on that damning assessment by the regulator - and the consumer detriment that followed - it will be interesting to see who thinks a UK pooled annuity fund is an attractive commercial undertaking.
