Sell Annuities from April 2017
The government has confirmed that with effect from April 2017 those that have bought an income for life with their pension pots will be able to reverse that deal and sell their annuity in exchange for a cash lump sum.
The government estimates that the five million people who have bought annuities, currently receive £13bn a year in income, and the move is designed to bring their treatment in line with that under new pension freedoms.
Currently, it is possible to sell an annuity, but tax is levied at between 55% and 70% which makes it uneconomical for most; under the proposed changes, individuals who receive a lump sum from selling their annuity will only pay tax at their highest marginal income tax rate.
The government says it will bring in safeguards to help people avoid making bad decisions when selling annuities and Pensions Minister Ros Altmann says that for most people ‘keeping their annuity will still be the right decision’.
The government proposes to allow pensioners to sell their annuity back to the insurance company, but only through an intermediary to ensure the customer shops around to get the best deal; annuity purchasers and intermediaries will be regulated.
Pension reforms introduced in April 2015 removed the obligation for personal pension savers to purchase an income for life via an annuity with their pension fund and instead gave them virtually unfettered access to do with it what they will.
Pension savers can now take all of their pension pot as a cash lump sum if they so wish, but the new rules did not affect those who had already bought an annuity which is what the government seeks to address with its latest proposal.
Adrian Walker, at Old Mutual Wealth, said: ‘The secondary annuity market is likely to be relatively limited and attractive to those currently in receipt of a small regular payment. For those people a lump sum may be viewed as more valuable.’
To protect consumers, the Treasury says free advice will be available to annuity-owners from the existing Pension Wise service; a recent YouGov survey suggested that less than 20% of people would consider selling their annuity, due in the main to a concern they would not receive what they perceive to be value for money.
‘For the vast majority of customers, selling an annuity will not be the best decision’
Research from Portal Financial shows that people’s expectations of the price they will be able to achieve for their annuity may be unrealistic with 66% wanting to recoup 90% of its value and a further 13% seeking 80%.
In reality, annuity contracts are unlikely to be unwound by the insurance company but will be sold on to institutional investors who will offer you a lump sum in return for your income; they are obviously treating this as a source of profit and when tax is taken into account, those seeking to sell an annuity could see a 30% erosion in the ‘value’ of their policy and that may be sufficient to convince them to sit tight.
For some annuity sellers, independent financial advice will be compulsory if the sums involved are large enough.
The Treasury is quoted as saying ‘For the vast majority of customers, selling an annuity will not be the best decision,’ adding ‘however, individuals may want to sell an annuity for instance to provide a lump sum for relatives or dependants; in response to a change in circumstances for example getting divorced or remarried; or to purchase a more flexible pension income product instead,” it added.