secondary annuity market ifoa research · • level of awareness of the secondary annuity market...

Secondary Annuity Market

IFoA Research

16 June 2016


IFoA Annuitant Opinion Polling

16 June 2016

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IFoA research on annuitants’ attitude to secondary annuity

market

• The IFoA has undertaken independent opinion polling with YouGov to survey attitudes of those

with an annuity.

• This follows an initial high-level poll shortly after the proposals for a secondary annuity market

were first announced.

• This second poll surveyed the:

• level of awareness of the secondary annuity market

• appetite for selling an annuity, and what those polled would do with the proceeds

• value those polled would place on their annuity

• appetite for taking independent financial advice before cashing-in an annuity

• attitude to proving the state of health to firms buying their annuity.

• In total, YouGov interviewed 2,017 annuitants in the latest survey, aged 55 or over.

16 June 2016 3


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Characteristics of annuitants polled

• Average pension pot size of those surveyed was £68,577, with an average annuity payment of

£4,300 per annum

• 50% of annuitants have a spouse/ partner named as a beneficiary

• this decreases to 45% amongst those who claim they would be likely to sell their annuity

income in the future

• Half of those surveyed also receive an income from a Defined Benefit Pension Scheme

• on average, this boosts income by over £15,000 per annum for those who have this

• 7% of those receiving income from a DB scheme now or in the future would be interested in

selling their income from this type of scheme

• 78% indicated they would not be interested; the balance (15%) did not know

• 67% said they felt secure financially for the future

• 33% said that income from their annuity is key to their financial future.

16 June 2016 4


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When researching annuities, 44% used an IFA, making this

the most common source of help

44%

26%

14%

4% 2%

10%

Used an IFAwho dealt withwhole process

Took annuityfrom companyI had pensionssavings with

Used internetto compare

products, thendealt with

myself

Used internetto compare

products, thenused

comparisonwebsite

Used PensionWise

Other0%5%

10%15%20%25%30%35%40%45%50%

Information/ help used when researching annuities

16 June 2016 5

1 in 4 indicated they took an annuity from the provider with whom they

had their pension savings


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Two-thirds of annuitants claim to be aware of the proposals

for a secondary annuity market

66%

31%

2%

Awareness of secondary annuity market:

Yes No Don't know

16 June 2016 6

Awareness of the changes is higher

amongst:

• Men (69% of men are aware compared to

62% of women)

• Those aged 60-64.


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Annuitants are more likely to say that the proposed changes

sound like a good idea in general, rather than a good idea

for their circumstances

16 June 2016 7

Selling an annuity, so that people

who currently receive regular

amounts can exchange this for a

lump sum, sounds like something

that is a good idea in general, even

if it’s not a good idea for me

37% Agree (strongly/ slightly)

Being able to sell my annuity, so

that I receive a lump-sum instead of

regular amounts sounds like

something that would be a good

idea for me

Those more likely to see the proposed changes as a good idea for them include:

• Younger age groups: 42% of 55-59 year olds and 29% of 60-64 year olds

• Those who disagree they feel financially secure for the future (35%).



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Around 1 in 5 annuitants claim they are likely to sell their

annuity income in return for a cash lump sum

The likelihood of doing this increases amongst the

younger age groups

16 June 2016 8

Age % Likely to sell annuity

income for cash lump sum

55-59 34%

60-64 24%

56-69 19%

70-74 14%

75+ 8%

Likelihood of selling

annuity income in

return for a cash

lump sum

18% likely

(strongly/

somewhat likely)

The likelihood also increases with those who disagree they feel financially secure for the

future (28%).


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The majority of those surveyed struggled to say whether or

not they would buy another retirement product, if they were

able to sell their annuity

25%

9%

11%

55%

Would you use the proceeds from annuity to buy a different retirement product?

No - I would take the full lump sumpayment as cash

Yes - I would buy an annuity withdifferent benefits to my current annuity

Yes - I would buy a drawdown product /flexi access fund

Don't know

16 June 2016 9

55% indicated they ‘don’t know’ what they would do.


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Annuitants would be prepared/willing to accept on average

94% of the total amount of future annuity payments

Percentage of the amount of expected future payments annuitants would be willing to

accept:

16 June 2016 10

41%

9% 12%

0%

12% 12% 15%

Nothing lessthan 100%

96% to 99% 95% 91% to 94% 90% Less than 90% Don't know

The average percentage was 94%

• the percentage of future payments allowed for the (estimated) impact of the cost involved in

cashing-in the annuity.


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The most useful method of helping annuitants determine the

value of their annuity is to receive a statement giving them

the value of it

16 June 2016 11

Individual statement from current

annuity provider setting out financial

reporting value


General leaflet explaining factors

should consider when selling annuity


Legal requirement to take

professional advice, which would

have to be paid for

Legal requirement for free, tailored

information from public bodies such

as Pensions Wise

67% Agree (strongly/ slightly) 37% Agree (strongly/ slightly)


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Appetite for independent financial advice if selling annuity

for cash lump sum is mixed

54%

25%

20%

Would take independent financial advice before selling annuity income for cash lump sum?

Yes No Don't know

16 June 2016 12

45% indicated that they would not or did not

know whether they would take independent

financial advice

59% of women claim they are likely to seek

advice, compared to 52% of men

Those who would take advice would pay an

average of £162 for it

• the average for men was £184; for

women £120.


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Those who claim they are most likely to sell their annuity are

more likely to try and organise the sale themselves

39% 43%

19%

29%

57%

14%

My financial advisorwould get quotations

from potentialpurchasers and

recommend the bestoption for me

I would go online andget quotations from

potential purchasers.I would then organise

the sale myself.

Don't know

0%

10%

20%

30%

40%

50%

60%

Approach would take to selling annuity:

Total

Amongst those likely to sellannuity

16 June 2016 13

…rather than get a financial advisor to organise quotations for them


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26% would be prepared to share their GP records; 25%

would be willing to undergo a medical examination

48%

26% 25% 29%

12%

65%

39%

32%

13% 8%

Complete amedical

questionnaire foruse by potential

purchasers

Grant potentialpurchasers of myannuity access tomy GP records

Undergo amedical examwith the results

provided topotential

purchasers

None of the above Don't know0%

10%

20%

30%

40%

50%

60%

70%

Medical information willing to share if trying to sell annuity for cash lump sum:

Total

Amongst thoselikely to sellannuity

16 June 2016 14

…in order to prove the state of their health to firms buying their annuity


Lessons from Around the World

16 June 2016


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IFoA research on lessons from around the world

• The IFoA has also commissioned research on what can be learned from around the world,

relevant to the secondary annuity market

• A range of markets were analysed:

• Australia: pension freedoms, traded endowments

• USA: pension freedoms, life and structured settlements

• UK: traded endowments

• Germany: secondary life assurance market.

16 June 2016 16


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Lessons from Australia and the USA

16 June 2016 17

Pension freedoms for some time

Retirees can take lump sum or

drawdown (90%)

Annuities less popular, but has

been recent innovation

No secondary annuity market

Was traded endowment /

life settlement market (whole of life)

• Cost of advice has been an issue

• Impact on mean-tested benefits

should be clear

• Health of secondary market depends

on health of primary market

Pension decumulation market

dominated by drawdown

Thriving structured settlement

market (temporary income awarded

on accident)

Sale of income requires Court

approval

Also large life settlement market

• Evidence that around half will

exhaust pot before death

• Specialist advice can be expensive

• Transparency of fees?

• Cost effective way of ensuring

policyholder still alive?

Australia USA


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Lessons from UK and Germany

16 June 2016 18

Traded endowment market since

early 1990s

(Many policies 25- year term, so

drying up)

Insurers required to inform

surrendering policyholders of

secondary market

Access improved with technology

(exchange platform)

• Health of secondary market depends

on health of primary market

• Many sold on execution only basis:

sellers well-informed?

• Market deeper if sale of small

policies viable

Small secondary market in life

assurance contracts

Quality standards applied to ensure

consumer protection

Sellers kept some premium:

maintaining communications with

insurer

High fees, yield disclosure and payment

of lump sum in instalments have all

meant regulatory intervention

UK Germany


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General conclusions

• Annuity puzzle: take-up of annuities is lower than would be expected according to rational

economic theory

• poor understanding of longevity, investment risk

• current annuity rates/ bad press

• Secondary markets generally popular with consumers

• Health of secondary annuity market linked to the health of the primary market

• given pension freedoms, decline in annuity market?

• Leakage from retirement savings into tax-advantaged savings, and also bequests.

16 June 2016 19


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Legal/ compliance and consumer protection lessons

16 June 2016 20

Insurers required to allow

reassignment of annuities?

Disclosure of fees:

Mandatory for introducers,

extended to all?

Transparency over tax for buyers

and sellers

Impact on means-tested benefits

clear

Simplified rules for trivial annuities

- could save costs for all parties

Most annuitants will be unable to

assess what represents fair value

=> Financial guidance/ advice

appropriate

Encouragement to take advice: tax

relief of cost?

Mandatory advice for larger

annuities?

Legal & compliance Consumer Protection


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Lessons for effective market operation

• Focus on minimising costs for buyers will facilitate viable market for smaller annuities

• for example, underwriting and existence checking

• For small annuities, issuing company may be the only bidder

• Should annuity writers be required to disclose the secondary market to annuity purchasers?

• Access to General Register Office of death may help existence checking

• a modest retainer fee paid by buyer to insured may also help with existence confirmation?

• Funding of market infrastructure, particularly if relatively short-lived?

16 June 2016 21


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Lessons for underwriting

• Underwriting will be required for most annuitants, and this may be a surprise where they were

not underwritten at outset

• as above, underwriting costs will be a significant factor in relation to smaller annuities

• Lessons can be learned from the enhanced annuity market, with its existing underwriting

processes

• Data protection needs to be investigated to see if there are issues in disclosing data to

different parties to the transaction

• Potential buyers of annuities will worry about real or perceived anti-selection and this may

impact prices.

16 June 2016 22

secondary annuity market ifoa research · • level of awareness of the secondary annuity market...

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