Returns from many second hand annuities could be just three quarters of the expected value according to pension experts.
The second hand market, due to open up from April 2017, may also drive the cost of policies up as the life insured will no longer have any interest in notifying insurance companies of deaths.
Portal Financial say the expected value of the average annuity to take hits based on government mandated financial charges, broker exchange rates, administration charges and the expected investor profit margin.
The gap between value and cost could rise even higher if other anti-fraud costs, overseas investors or requirement for medical information could come into play.
Portal Financial estimate losses based on the average £42,000 annuity will be:
- £500 – £1,200 – estimate of the mandatory financial advice charge as announced by the Government;
- £1,500 – £2,600 — 3%-6% the second-hand annuity ‘broker’ / exchange charge;
- £2,500 – £4,200 – the 6%-10% return that the buyer (investor) would be looking for from any purchase;
- £250 -£1,000 potential ‘administration’ charge by the annuity provider for costs associated with administration.
Jamie Smith-Thompson, Managing Director of Portal Financial said: “Creating a secondary market for annuitants wishing to sell their policy has potential advantages for some customers but, as the ultimate financial return that a policyholder will receive is likely to be significantly less than what the policy may have paid out over the full term, it requires careful consideration.
“Buyers will be third-party investors looking for a profit, so they will want to purchase as cheaply as possible.
“They may consider that a potential seller does not believe they will get the full value of the annuity, in other words that they do not believe they will live a long time, which will worry investors and reduce the sum offered on the secondary market.”
