IFoA responds to Government's announcement to allow pensioners to cash in their annuities

Nick Salter, President of the Institute and Faculty of Actuaries, comments on the Government’s announced proposals to allow existing pensioners to sell their annuity policy on the open market in exchange for a lump sum:

“Allowing existing pensioners to surrender their annuities will not be straightforward for pensioners, insurers or regulators, and so we welcome the plan for the FCA to consult on these proposals. It is critical that the wide-ranging implications of a secondary annuity market are fully understood. 

“For pensioners, access to adequate guidance or independent advice will be key to understanding the pros, cons and risks of the choices they face. Although the freedom to decide how and when to use their pension assets will be attractive, giving up a guaranteed income runs the risk of running out of money in late retirement if future longevity is underestimated. Whether annuity surrender values offer good value for money will be a concern; perceived value for money could be a particular issue in the current low interest rate environment, where the ‘true’ value of an annuity may be a surprisingly high number, and while the secondary annuity market is in an early stage of evolution.  

“The development of the secondary annuity market is likely to be challenging for insurers, coming at a time of significant change in the insurance and pensions industries. Insurers will need to design appropriate medical underwriting when determining the lump sum offered in exchange for an annuity, as those in ill health may be more likely to surrender their annuities than those in good health. Additionally, if a secondary market is established it may prove challenging to keep track of whether annuitants are still alive once payments are re-directed. 

“The ability to surrender existing annuities will change insurers’ business models.  This raises prudential regulatory issues as well as wider business conduct concerns on the secondary annuity sales process and degree of competition.”

~ENDS~

For further comment or to answer any questions that you may have please contact Annette Heninger at the IFoA on 07525 592 198 or by emailing annette.heninger@actuaries.org.uk

Editorial notes

About the Institute and Faculty of Actuaries

The Institute and Faculty of Actuaries (IFoA) is a royal chartered, not-for-profit, professional body. 

Research undertaken by the IFoA is not commercial.  As a learned society, research helps us to fulfil two of our royal charter requirements; to further actuarial science and serve the public interest.  

Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.

Members of the IFoA have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.

Members are governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of actuaries in society.