From next year, those of you holding an annuity will be able to “resell” it. Good idea… or bad? And who might be able to gain from the move? By Mark Soper.
George Osborne has confirmed the go-ahead for the “resale” of existing annuity plans from April 2017 – a move that was pencilled in when pensions freedom was first announced but delayed while the market digested the first wave.
Why is this happening?
Osborne believes it is not for the State to determine how people use their assets and incomes and he now wants to extend the new pension freedoms to the approximately five million people who purchased annuity plans at a time when it was seen as a preferred way to provide a regular income through retirement.
The Government view is that for most people, keeping the annuity will be the right decision… but for some their may be clear benefits in exchanging a guaranteed annuity income for a cash lump sum.
Of course, the current annuity rules do not specifically ban the resale or re-assignment of an existing annuity plan. However, the punitive tax system effectively bars such a transaction. The Government aims to change these tax rules – thus allowing a secondary annuity market to be created and developed.
So how will it work?
In exchange for their current level of annuity income, the seller (ideally having shopped around for the best offer!) will receive a cash lump sum offered by the buyer. This lump sum is then subject to income tax at the annuitant’s appropriate tax rate unless the lump sum is immediately transferred to a different pension product.
For most people, an injection of such a lump sum of money into their annual income would pull them into higher rates of tax, so in theory taking out the money and spending it (or even using it to clear other debts) would not seem to be a sensible option. But – as I explain below – that does not apply to all.
How will it work?
The cash sum paid out directly to the annuitant in exchange for the income will be subject to income tax at the annuitant’s appropriate tax rate on the date the payment is made. As an alternative the annuitant may chose to have the lump sum transferred to a new retirement product e.g. an Income Drawdown plan and drawdown periodic income rather than taking the lump sum. i.e. the income tax may be deferred.
Each income payment will be subject to income tax at the individual’s appropriate rate when each income payment is made. However, all the Income Drawdown rules pertaining to a standard Income Drawdown plan will apply – including the potentially generous tax treatment of the Income Drawdown fund on the death of the individual.
What happens behind the scenes…?
Whoever purchases the annuity effectively takes over the role of the annuitant – and the annuity income will continue to be paid out by the original annuity provider to the new purchaser. The annuity income payments will continue to be paid out for the lifetime of the original annuitant and any survivor if a survivor’s annuity has been established.
How much might you get for your old annuity?
That will be dictated by market forces (demand vs supply) together with what a prospective purchaser thinks it’s worth – once they have assessed the risks and added their margins.
How much the new purchaser is prepared to pay will depend on a number of factors: the existing level of annuity payments, the annuitant’s age and health status, the existence of any survivor’s annuity and the buyer’s transactional costs and profit margin.
Unlike the original pensions freedom announcement, which caught everyone on the hop, the financial sector will have a little more time to assess how they might approach this market.
How will sellers be protected?
The Government are consulting with the pensions industry and the FCA to ensure appropriate consumer protection will be in place by April 2017. This is likely to include free guidance to be dispensed by Pensions Wise and the Money Advice Service but the Government may go further and insist that individuals shop around for the best deal and/or seek professional independent advice – particularly for larger annuities being given up.
With so much resting on the amount of the cash sum, the Government has stated that a ball park buying price guide should be developed to help annuitants gauge if a fair price is being offered. The Government may also relax the bar on the existing annuity provider buying back the annuity – provided a check has been made to ensure the annuitant has shopped around.
My view?
The rationale of allowing existing annuity holders to access the new pension freedoms is both sensible and potentially liberating, particularly for annuitants who may be receiving tiny amounts.
The loss of this income may not impact too deeply on the household finances whereas the injection of an immediate cash lump sum may prove a big help if the annuitants have any debts or need to finance big ticket items such as a car.
Many people will have more than one annuity, and some may elect to sell one for a future income, another for cash and retain others.
Critically, anyone considering a sale must understand the income tax consequences and – importantly – if the addition of a lump sum in any tax year pushes the seller into a higher tax bracket, the transfer of the annuity lump sum to an Income Drawdown plan may work out to be more attractive than taking all the cash up front.
