This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
The secondary annuity market, enabling individuals to assign or surrender their pension annuities, is due to be introduced from April 2017. Three recent consultations from HMRC, HM Treasury and the FCA provide the detail as to how this will work.
The HM Treasury and FCA consultations deal with regulated activities relating to the new market. There is also now a requirement in the Bank of England and Financial Services Act 2016 for individuals to be offered guidance, or for higher value annuities, to be required to take financial advice before assigning or surrendering their annuity.
The proposals will not alter or override any existing contractual rights – so the assignment or surrender of annuities will only be available if the terms already provide for it (which is unlikely) or if the insurer consents.
The success of this new market will depend on whether buyers have the appetite to get involved and whether they are able to offer individuals an acceptable capital amount to make them want to make the switch.
The HMRC consultation looks at changes to tax and authorised payment provisions needed to enable the secondary annuity market.
The main scope of the proposed provisions will be:
- Unauthorised palments will not arise where individuals assign or surrender rights to payments payable to them under annuities that were purchased with assets from a registered pension scheme. This includes ‘deferred’ annuities that have yet to come into payment.
- The new tax rules will permit individuals to assign or surrender annuities payable to them that were purchased in respect of money purchase or defined benefit arrangements.
Individuals will be able to apply the proceeds of the assignment or surrender in line with three options:
- a lump sum paid directly to them;
- a payment in to a flexi-access drawdown fund;or
- the purchase of a flexible annuity.
The new rules will only apply where the individual has the right to receive payments under the annuity but the consultation states that 'it is intended that schemes should be able to assign annuities in their name to members'. This suggests that trustees may be given an overriding power to assign annuities – although, if not, this will depend on scheme rules and the terms of the annuity.
Some basic concepts:
- All the rights under annuity must be surrendered or assigned at the same time.
- Where the annuity contains contingent rights, the full lump sum should still be paid to the person with the actual rather than contingent rights (although see joint life annuities below).
- The individual must have reached NMPA or be entitled to payments due to ill-health (except it can be at any age in relation to a deferred annuity).
- Assignments or surrenders will not count as a contribution for annual allowance purposes.
- Joint life annuities can be converted into flexible joint life annuities (this is the only exception to the rule that the entire annuity must be surrendered or assigned for the benefit of the main beneficiary).
- Lump sums will be taxed at the annuitant's marginal rate of income tax and will trigger the money purchase annual allowance.
- Transfer to a flexi-access drawdown fund will not trigger a tax charge. Income paid from the drawdown fund will be taxed as income in the usual way.
There will be new information requirements:
- Insurers who issued the annuity will have to notify HMRC when it has been surrendered or assigned.
- Insurers who issued the annuity will have to notify the individual of their tax responsibilities when a lump sum is paid.
- Purchasers of annuities will have to notify HMRC about lump sums paid.
- Where applicable, flexible access statements must be issued (i.e. notifying the member of the money purchase annual allowance).
