Since greater pensions freedoms were introduced in April 2015, individuals retiring in the UK have had significantly wider choice where it comes to accessing their pension savings.
The choices now include:
- taking all the pension savings as a lump sum, subject to income tax on 75% of it;
- taking up to 25% of the pension savings tax free, and using the remainder to purchase an annuity;
- using the whole of the pension savings to purchase an annuity;
- taking up to 25% of the pension savings tax free and then drawing down income as and when required (known as “income drawdown“).
In March 2015, the UK Government consulted on plans to provide even greater flexibility by allowing people who have purchased an annuity to surrender the annuity back to the annuity provider (referred to as “surrender” or, from the perspective of the annuity provider, “buy-back“) or to sell it to a third party (referred to as “assignment“), in each case in return for payment of a lump sum or certain other forms of payment. The results of the consultation were published in December 2015 and further consultations have subsequently been published on the associated tax treatment, secondary legislation, and regulatory framework.
Since the proposals were announced, there has been significant discussion in the market about the viability of these proposals, and in particular on the willingness of insurers, potential investors and intermediaries to take the time – and make the investment – necessary to create a functioning market for the surrender or assignment of annuities. Such a market is generally referred to as a “secondary annuity market“.
The UK Government acknowledges that, for most retirees, retaining an annuity will still be the best option. However, the Government is also committed to ensuring the widest possible consumer choice. It is also apparent that insurers and other market participants may find opportunities in this new market. Annuity income streams could, for example, provide a partial hedge against longevity risks for institutional investors, or provide a trading product for onward sale, possibly packaged with other annuities into an investment fund or securitisation structure.
Against this backdrop, we have prepared a note summarising the conclusions reached by the UK Government to date and some of the key legal implications of the proposed reforms both for annuity providers and reinsurers offering protection to them. Please click here to download our note.