The mechanics of a secondary annuity market remain unclear
In last March’s Budget the Chancellor announced that the government would look into how existing pension annuity holders might sell their lifetime income in return for a taxable lump sum. The logic was that it would give existing pensioners the same flexibility as is available to those now reaching retirement.
The subsequent consultations raised some complex issues and by the second Budget of 2015, the Chancellor decided that implementation would need to be delayed until April 2017. What is becoming clear is that the most obvious purchasers – the original annuity providers – will face restrictions on buying back their own annuities.
In most instances sales will have to be arranged through intermediaries because the government will legislate to require that anyone planning to sell an annuity “above a certain [unspecified] value” will have to take advice first. The main reason for this is that, in the government’s view, “For most people, retaining an annuity will still be the best choice – it provides a regular, guaranteed income for life…”. Of course, this raises the question of whether all of the time, effort and expense spent in this matter is worthwhile.
We must also consider that the value placed on an existing annuity is likely to be relatively poor: any prospective buyer will be looking to cover their expenses and then receive a return better than current annuity rates imply. The buyer will need to take account of the impacts of the cost of selling on the alternative returns they might get from the sale proceeds. In any event, the option of a sale is not assured, as there will be no obligation on insurance companies to allow their policies to be traded.
One interesting aspect of the government’s proposals is that it will also apply to new annuities, not just those in force already. Clearly, that could prove an expensive lifeline. If you are nearing retirement, it is far better to take advice before drawing benefits rather than hoping to unscramble an error at a later date.
The value of your investment can go down as well as up and you may not get back the full amount you invested.