Sell annuity payment
Is selling your annuity a good cash deal?
We answer some of the questions you should be asking before you commit to selling your retirement income.
What is the government proposing? In a widely trailed move, George Osborne said that around 5 million pensioners who have previously used their retirement savings to buy an annuity will be allowed to sell it for a cash lump sum from April 2016.
An annuity is a regular monthly income that savers – largely from private sector companies – receive at retirement in exchange for their lifetime pension savings.
People wanting to sell their annuity income to a willing buyer currently face a 55% tax charge, rising in some cases to 70%.
Who does it affect? Anyone who used their private pension pot to buy an annuity prior to the new freedoms which allow them to do what they like with the money in their pension pot. Many complain they are trapped in poor-value annuities – which also disappear on their death rather than being passed on to heirs.
I have an annuity. Should I sell it? Even Osborne reckons that “for most people, sticking with that annuity is the right thing to do”. People who are in their late 80s or 90s generally have very good annuities – some of them paying them an income of 15% a year – which they will not want to swap.
But if you have taken out an annuity in the past couple of years, when rates have fallen to historic lows, you may want to obtain a quote on how much it might get if you cash it in.
The government says: -“Individuals may want to sell an annuity, for instance, to provide a lump sum for relatives or dependents; pay off debts; in response to a change in circumstances, for example getting divorced or remarried; or to purchase a more flexible pension income product instead.”
How much will I get for my -annuity? The government suggests that your annuity income will be offered at -auction and financial institutions will bid for it. You sell it to the -highest -bidder for cash, then the annuity -company pays the buyer the income that you would otherwise have been receiving until you die.
The older or less healthy someone is, the less they will receive for their -annuity as the buyer will only receive the income until the seller’s death.
Figures from Fidelity Worldwide Investment suggest that a £100,000 pension pot used by a 65-year-old to buy a £7,000-a-year annuity 10 years ago would sell for about £48,000 today. Which means that the now 75-year-old would be giving up their £7,000 a year income for just £48,000, which may not sound like such a good deal.
However, others reckon that for the recently retired, selling up could prove to be attractive. According to Hymans Robertson, an independent pensions consultancy, holders of annuities who bought five years ago could get back as much as they put in, despite the fact that they have been drawing an income throughout those five years.
It estimates that someone who used their £50,000 in savings to take out an annuity five years ago when they were 65 would have been given an income of £3,600 a year, so would have received £18,000 in payments so far. It then calculates that the now 70-year-old would be able to sell it for £58,900 – ie, leaving them with £8,900 more than they had five years earlier, despite taking the income over that time.
Will I have to pay tax? Almost certainly, unless you are on a very low income. The cash you receive on the sale of your annuity will be taxable in the same way as any other income you receive in that tax year.
For example, let’s say you are 70 and receive £75,000 on the sale of your annuity in 2016. Your only other income is the state pension, worth around £6,000 a year. For the tax year 2016-17, you will be taxed on total -earnings of £81,000, meaning that nearly £40,000 will be taxed at the 40% higher rate tax. Some people with larger annuities could even be tipped into the 45% tax band which applies to incomes in excess of £150,000.
Why do I have to wait until April next year? No market for annuities yet exists, so the government this week launched a consultation on the -measures needed to establish one. The government will also be working with the Financial Conduct Authority to put consumer protection measures in place.
Why can’t I just hand it back to the annuity provider? The Treasury said: “The proposal will not give the -annuity holder the right to sell their annuity back to their original provider, and the government is not minded to allow the original annuity provider to purchase, and then discontinue their own customers’ annuities.”
Will I be able to buy someone else’s annuity? No. The government has also made it clear that only “institutional” buyers will be able to purchase annuities from an individual, and that it will not be suitable for “retail” investors.