The Government has axed plans for a secondary annuities market over fears about consumer protection in a surprise announcement late this afternoon.

The Economic Secretary to the Treasury, Simon Kirby, said: “Allowing consumers to sell on their annuity income was always dependent on balancing the creation of an effective market with making sure consumers are properly protected.

“It has become clear that we cannot guarantee consumers will get good value for money in a market that is likely to be small and limited.

“Pursuing this policy in these circumstances would put consumers at risk – this is something that I am not prepared to do.

“The government has always been clear that for the majority of people keeping their annuity incomes will be their best option, estimating that only 5% of people who currently hold an annuity would take advantage of this reform.”

AJ Bell senior analyst Tom Selby said:“The plans for a secondary annuity market were always riddled with problems. The market would have been stacked in favour of the buyer and posed unacceptable risks to savers, who could have seen the value of their pot ravaged by charges.

“Pension scammers would also inevitably have seized on the changes to target annuity holders. It was difficult to see a long term market where consumers would have got good value.”

The Treasury statement read: “Over the past few months, following a wide range of discussions, it has become increasingly clear that creating the conditions to allow a vibrant and competitive market to emerge, with multiple buyers and sellers of annuities, could not be balanced with sufficient consumer protections.
Many firms have shown they are willing to allow customers to sell their annuities, but the government is clear that there will be insufficient purchasers to create a competitive market.

“While exploring this further, it has become clear that the steps that the government would need to take to create purchasing demand in the market would undermine other consumer protections.

“Consumer protection is a top priority for the government and we are not willing to allow a market to develop which could produce poor outcomes for consumers, such as receiving poor value for their annuity income stream and suffering higher costs.”

More reaction

AJ Bell’s Mr Selby said: “It’s interesting to note that by ditching this policy, Philip Hammond has binned one of George Osborne’s key pensions pledges. The industry will now wait with baited breath for further announcements from the Treasury ahead of the Autumn Statement, most notably on the future of pensions tax relief.”

Andrew Pennie, Head of Pathways, Intelligent Pensions, said: “So the secondary annuity market has failed before it even started. This is not such a bad thing and while a small number may well have been looking forward to the opportunity of selling their annuity, overall it’s probably an unnecessary distraction avoided.

“The main reason behind this decision is the risk of poor consumer outcomes; people most vulnerable and in need of ongoing income attracted by the lure of immediate cash. It was always a challenge to see how value could be achieved for an annuity seller in a market that was going to incur costs of underwriting, general administration and in all likelihood, regulated advice. With a relatively small percentage of people predicted to use the secondary annuity market, in the absence of value for the user I think it’s right the government has put this initiative to bed.

“Perhaps now the government can refocus its resources on ensuring people don’t invest in the wrong retirement income strategy at the outset which will require delivering greater individual support and much wider access and use of regulated advice.”

Tom McPhail, Head of retirement policy, at Hargreaves Lansdown, said: “This will no doubt come as a disappointment to some annuity holders who were looking forward to restructuring their retirement income, however it is the right decision. After extensive research, at the beginning of September Hargreaves Lansdown, the UK’s largest annuity broker announced that it would not be participating in the secondary annuity market. Our reasons for this decision were very similar to the government’s. The risks to the vast majority of annuity holders outweigh the benefits for the small minority who could benefit.”

He said: “This is also perhaps an interesting political change of direction. The pension freedoms were George Osborne’s baby. The secondary annuity market concept was enthusiastically supported by the two most recent pensions ministers. The fact that it has now been dropped could be indicative of a new government which is progressively shedding the legacy policies of the Cameron/Osborne era and is increasingly pursuing its own agenda.”

Steven Cameron, Pensions Director at Aegon, said: “All the signs were the secondary annuity market would have been a pension freedom too far. Giving up a guaranteed income for life is a huge decision and not the right one for the vast majority.

"The risks and complexities for the many far outweighed any possible benefits for the few. We welcome the Treasury making this brave decision on grounds of consumer protection.”

Old Mutual Wealth pensions expert Jon Greer said:“The secondary annuity market was very likely to have been fraught with danger.

“It was a political promise made before the practical application of the policy had been considered, but shelving the proposals so soon is a major u-turn that the government will not have undertaken lightly. The new Chancellor has made the bold choice of prioritising consumer protection over a political promise from George Osborne.

“We always believed second-hand annuity sales were likely to have limited appeal and would be attractive primarily to those in receipt of a small regular payment that would instead prefer a lump-sum.

“Trading in an annuity product would have left people exposed to our natural bias to favour payment in the short term, rather than a steady income received over time. This tendency to value reward today over reward tomorrow made the proposals really risky.

“And there were numerous unanswered questions about precisely how the market might operate. Would consumers be able to take advice? What protections would they have against rogue dealers? And there was a lack of evidence that there would be sufficient competition from buyers to ensure a healthy market.

“Consumers were always wary of these proposals, and research we conducted previously shows many feared they would not get value for money.”