'Risk warnings' needed on annuity sales - City regulator
People considering selling their annuity should be given "risk warnings" by the firms involved, under proposals set out by the City regulator.
From April 2017, people who have an annuity, which gives pensioners a guaranteed income, will be able to sell it on for a lump sum and around 300,000 people are expected to take up this option.
The Financial Conduct Authority (FCA) has published a consultation on proposed rules around the new secondary annuity market.
It said that while the latest pensions shake-up will give some consumers more flexibility, there are also potential risks from consumers running out of money in retirement if they sell their annuity and some people struggling to put a value on their annuity.
Some consumers may be particularly vulnerable as "there is a higher incidence of reduced mental capacity among potential annuity income sellers," the consultation document said.
Under the proposed rules, firms will be required at the earliest opportunity to give those considering the sale of their annuity specific risk warnings and to recommend that they seek regulated financial advice or guidance from the free-to-use service Pension Wise.
Those firms giving the risk warnings could be a potential buyer, a broker or an annuity provider, depending on who the consumer makes contact with. If consumers can show they have already received the risk warnings from another firm, they will not need to receive them a second time.
Firms will also be required to recommend that sellers shop around under the plans.
The FCA has also proposed that annuity providers will only be able to recover "reasonable costs" when charging to set up annuity income sales.
It also proposed that brokers must set out their charges up front and agree them with the consumer selling their annuity, rather than being paid by commission from firms acting as buyers.
And to help consumers judge the true value of the annuity income they are planning to give up, the FCA has proposed that buyers and brokers making an offer for a seller's annuity income will 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.
Christopher Woolard, director of strategy and competition at the FCA, said: "Opening up this market extends the Government's pensions reforms to those who have already bought annuities, however, there are potential risks involved for consumers and we recognise that some consumers may be particularly vulnerable.
"We have set out proposed rules and guidance today that will help ensure that consumers have an appropriate degree of protection should they decide to sell their annuity income."
The FCA consultation is open until June 17.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: "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 and protect investors, while also giving them the freedom to manage their own money.
"All fees and transaction costs have to be disclosed upfront; however, they could easily absorb 10% or more of the value of the annuity, so this may also put a lot of people off."
Yvonne Braun, director of policy, long term savings and protection at the Association of British Insurers (ABI), said: "The FCA is right that the secondary annuity market comes with potential risks to customers. We also agree that consumers in this market are more likely than in other markets to be vulnerable, so this consultation is essential."
She said there are still outstanding issues to work through in a "limited timeframe", adding: "We will be working closely with the FCA as we develop our response to the consultation, to help address the risks and enable those who could benefit to do so."