Annuity surrender or sale

Hi - I'm not sure that I totally understand what you are suggesting here: is this intended to be a replacement opportunity for an existing annuitant to basically 'trade' their annuity benefit cashflows for a lump sum in a jurisdiction where surrenders and secondary market transfers are not available or permitted? (Yes, the availability of such a secondary market would be subject to legislation - but also would rely on market forces.)

The main issue here relates to anti-selective potential and value for money. A significant proportion of those wishing to cash in their annuities (that are already in payment) will be those who are in relatively poor health and who are thus not expecting to receive many further annuity payments. Consequently any value that would be offered on the secondary market would be pretty low (the market players would underwrite the individuals) - and may well not be deemed to be of sufficient value to the individual for them to take up the offer. Bear in mind also that the provider of the cash lump sum would need to take margins to cover their own expenses and also profit margin.

Similarly, annuities may be perceived to be poor value for money by the existing holders (who may thus wish to attempt to cash them in) at precisely the time when the amount that would be offered by the market would be relatively low (higher interest rates or bond yields than were used to price the annuities).

Indeed, the UK government's proposals to introduce a secondary annuity market a few years back was abandoned largely due to concerns relating to value for money (and the likely limited market size).

The same would seem to be the case for what you are proposing, if I have understood it correctly. The amount that an individual in relatively poor health would receive, after allowing for paying what would be a pretty expensive whole life assurance premium, would also be unlikely to be perceived to be good value for money by the individual. Also, as you say, the arrangement proposed involves more components and so there would be associated erosion of value from the costs involved - and of course the profit margins that would be taken by the provider(s).

Does that help to make some more sense?

 

I think that this final point hits the nail on the head!

In the UK, the main reason for the U-turn on the government's intention to permit a secondary annuity market was its concerns about consumer protection. In particular, given that it seemed that there would be relatively few companies interested in operating in that market, there would not be sufficient levels of competition to guarantee fair price transactions for individuals. So there were concerns about individuals being given poor value for money and also that it opened up greater potential for exploitation by scammers.

OK, so Mrs Smith might be happy with something that isn't particularly good value (don't forget that underwriting is pretty expensive so that is going to knock a fair chunk off her payment too, however efficient WBAA might otherwise be!) and maybe she is financially sophisticated enough to make that call - but consumer protection is there to protect everyone, particularly those who are less able to make such decisions.

I look forward to watching you set up your new 'loan+whole life' enterprise in due course & wish you all the best!