Annuities (the financial product that turns your pension fund into a guaranteed income for life) have long been the most common way of providing an income in retirement, mainly because they were largely compulsory. So when Chancellor George Osborne declared “Let me be clear: no one will have to buy an annuity” back in March 2014, he completely changed the retirement income market overnight.
A year later, he announced that anyone who had bought an annuity would be able sell it for a cash lump sum. This news was well received by pensioners who felt they had been forced to buy an annuity with their pension savings, when they actually wanted the freedom to invest or spend their money in their own way. HM Revenue & Customs (HMRC) predicts that 300,000 people will take up the offer.
To sell or not to sell?
So if you have an annuity, should you consider selling it? You don’t need to decide just yet as the changes are unlikely to come into force before April 2017 at the earliest. The Government is in the process of working with industry specialists to determine whether or not it’s feasible, how it could work, and how a second-hand annuity would be valued.
While there are definite advantages to the scheme, such as freeing up a cash lump sum if you have enough retirement income from other sources, there are also grave concerns:
- How will an annuity be valued, and will you receive a fair price for it? This is likely to depend on your life expectancy, but it’s still very unclear how it will work.
- Pensioners could be ’ripped off’ if insurance companies choose not to offer the scheme. This could happen if they don’t think they can make a profit while also treating customers fairly. This in turn could open the door to unscrupulous buy-back schemes.
- How much extra tax will pensioners end up paying when they receive their cash lump-sum?
Let the seller beware
If the scheme goes ahead, and you decide to sell your annuity, make sure you proceed with caution. It will be hard to know exactly how much your annuity is worth, but try to think about how long you might live (and add five years), and how much income you would receive between now and then. You should also think about how much tax you would pay upfront, versus how much you would pay as and when you receive your income.
Michael Ward, Managing Director of PayingTooMuch.com said “Many people forget that annuities are actually a form of insurance against living too long, and remain a popular retirement income solution, despite some of the negative press they have received. Having a guaranteed income for the rest of your life, even if you live to 110, is a safety net that many cannot do without. As with any insurance product you should always shop around and read the small print before making any decisions.”