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FCA outlines rules for selling second-hand annuities

The FCA is consulting on proposals for a secondary annuity market, due to start next year
April 28, 2016

The Financial Conduct Authority (FCA) has launched a consultation on its proposed rules on how individuals will be able to sell their annuities on a new secondary market.

A secondary annuity market, which will be launched in April 2017, will see rules changed to allow anyone selling an annuity to do so without incurring a tax penalty. From next year, annuity-holders will be able to sell or 'assign' future annuity instalments to specified third-party firms, in return for a cash lump sum or an investment into a flexible drawdown policy.

The creation of the new market has been driven by the government's aim to give the same choices to people who bought annuities before the pension freedoms came into place last year.

The FCA's proposed rules recommend that the secondary annuity market operates on a fee-charging rather than commission basis. It says that brokers will be required to set out their charges up front and agree them with the individual who is selling the annuity.

In order to help people judge the value of their annuity income, buyers and brokers making an offer for a seller's annuity income will also be required to present their offer alongside the 'replacement cost' of the annuity income, if it were to be bought new on the open market.

Furthermore, firms will be required to recommend sellers shop around and give individuals considering selling their annuity specific risk warnings.

Both buyers and brokers will need to be authorised by the FCA, and the market will be within the scope of the Financial Ombudsman Service and the Financial Services Compensation Scheme.

The proposals have drawn mixed responses from the industry. Tom McPhail, head of retirement policy at Hargreaves Lansdown, says: "This is a complex market to create from scratch, however we know that many annuity holders will be interested in trading in their income for a lump sum. The FCA has come up with a good package of measures to try to protect investors, while also giving them the freedom to manage their own money. All fees and transaction costs have to be disclosed up front. However, they could easily absorb 10 per cent or more of the value of the annuity, so this may also put a lot of people off."

Jon Greer, pensions technical expert at Old Mutual Wealth, says: "The problem I can see with this market is that buyers are likely to have all the knowledge, and the sellers will have little to none."

The FCA's consultation is open until 17 June.