Monday 24th November 2016 – Annuity and LISA
We’ve picked out a couple of items that hit the news over the last week. These are:
- The government’s decision to scrap plans to allow people to sell their annuities on a secondary market
- Further negativity surrounding the yet-to-be-launched Lifetime ISA (LISA)
Annuities
The so-called Pensions Freedom has introduced great flexibility and a big offering of pensions products for those yet to retire. Although the changes have introduced complexity, most observers see the changes as generally positive for the public.
Not surprisingly, there are many who retired shortly before the Pensions Freedom innovation who elected for an annuity and are feeling short-changed. In order to rectify this feeling, the government announced that it would introduce legislation to allow people to sell their annuities and use the money to fund their retirement in different ways.
Since an annuity provides an income for life, it is based on assessing how long the applicant will live and takes into account demographics and high-level medical information. Any product offering to buy an annuity would, again, have to assess the clients expected longevity as the buyer would receive the income in place of the client and would have to factor in the cost of paying the money up front, the cost of administration and, presumably, some element of profit.
Since the announcement of intent to develop this facility, there has been growing concern among financial advisers that they were unlikely to support the product as there was a strong potential for future claims of poor advice.
The Treasury announced last week that they were scrapping the plans, explaining “we cannot guarantee consumers will get good value for money in a market that is likely to be small and limited, putting consumers at risk”.
A bitter blow for the consumers who intended to take advantage of the proposition and an expensive u-turn for those providers who have been developing products for launch. However, on balance, probably the right decision – by the time the annuitant had paid for advice, profit for the annuity purchaser and tax on the proceedings, the net return could have been nominal compared to the original purchase price. In addition, the client would lose their lifetime guarantee on income.
The Lifetime ISA (LISA)
We’ve reported in previous Blogs the mixed feelings that are emerging over the merits of the Lifetime ISA or LISA. Last week, the SNP weighed in, labelling the ISA as “a gimmick that benefits only those that can afford to save”. Their spokesman questioned the potential outcomes of choosing a Lifetime ISA over a pension and feared that the new product could undermine Auto Enrolment take-up.