Jeff Salway: Sold down the river for tax windfall

Annuity sales will swell Treasury coffers. Picture: John Devlin

Warned that there’s virtually no demand or support for a proposal that could cause untold chaos and damage, even the most determined might think twice.

But not the Treasury. Its plans to create a secondary annuity market – where people who have bought annuities can sell them for a lump sum – are firmly on course. It might have been delayed, but the foundations are being laid.

Only in very rare cases will selling an annuity be worth doing. Those who do sell will have little chance of getting a good deal. Make no mistake, this is not for the benefit of pensioners.

Even the government concedes that for most people, “keeping their annuity income will be the right decision – allowing them a stable and guaranteed retirement income”. So why go to all the hassle and expense of creating a market no-one needs?

The reason is very simple – tax revenue.

The Treasury last week tabled an amendment to the Bank of England and Financial Services Bill to make advice compulsory where an annuity is worth more than a certain amount.

This overlooks one very simple but important point – the smaller the pension pot, the lower your chances of getting a decent deal from selling your annuity, and the more you need advice.

One firm estimated earlier this year that people selling their annuities could lose 30 per cent or more of the potential income due to costs and up-front tax.

That might be a conservative estimate. Anyone selling their annuity already lost a chunk of their pension savings to charges and commission when they took it out. They’ll lose even more again on the sale, as well as being exposed to scams, a much reduced retirement income and a loss of entitlement to state support. Oh, and there’s the prospect of a nasty tax bill too.

Making advice compulsory for those with pensions above a certain amount offers very little protection. In all but a very small minority of cases the advice will be to forget the whole idea, and sharpish.

Those below the advice threshold – probably £30,000 but possibly up to £50,000 – will probably be directed to the Pension Wise guidance service, which can’t actually give any advice.

A better option, if we’re going to have this market at all, would be a threshold below which an annuity can’t be sold at all. The costs – from exit fees, commission, underwriting fees and so on – will make the market suitable only for large annuities where they can be absorbed without wiping out the value entirely. That’s before you factor in the income tax charged on the lump sum paid to sellers.

This is why even those who cheered pensions freedom have taken one look at secondary annuities and declared it to be utter madness.

The pension freedoms will in the long run prove to be an expensive mistake, in my view. But at least you can see why plenty of people will benefit from them.

A secondary annuity market, on the other hand, is the government selling people down the river in exchange for a tax windfall. It’s exploitation by another name.