From April 2016, the Government will remove the restrictions on buying and selling existing annuities to allow savers to sell the income they receive from their annuity without unwinding the original annuity contract.
The theory is that people will be able to ‘trade’ their future annuity income with an organisation, or reconfigure the benefits attached to their annuity (e.g. adding a spouse’s benefit to a single life plan) or they may just want to generate a cash sum.
What does this mean?
Can I trade in my annuity now?
No, these changes are currently due to be introduced from April 2016, however, there is likely to be a consultation period first to determine whether they will even be introduced.
Who will ‘buy’ my annuity if I want to trade it in?
At present this is unclear. The Government has stated that it is unlikely to be the provider/insurance company from whom the annuity is currently being received, however, it is expected that the organisations most likely to want to trade are insurance companies. The potential for a ‘second hand’ annuity market, including the likely players will be clearer following the proposed consultation period.
What value am I likely to get if I trade in my annuity?
At the moment this is unclear, and will largely be dependent upon the scope of the market created and the organisations willing to trade. Initial reports from the media suggest however, that after the deduction of income payments and sales costs, the offer could be 80% of the initial value or even less if the annuity has been in payment for some time.
What are the risks?
The main risk is that you will be offered very poor value and be charged high fees in order to trade your annuity. If traded for a lump sum, once that is gone, there will be no further income available.
What will be the tax position for annuities traded for a lump sum?
To help make this process viable, the Government will remove the tax charge currently in place (55% - 70% dependent on circumstances). Following the rule change people will simply be taxed at their marginal rate.
For anyone looking to retire now, or during the period to April 2016, an annuity could still be the most appropriate product to provide a retirement income.
During our advice process, when discussing options on retirement it is highlighted to members that an annuity is supposed to provide a guaranteed income for life. Other options are available that offer flexibility, but with flexibility come certain other risks.
In summary, for anyone looking to investigate whether they can trade in an annuity that they are currently receiving, they should be aware that:
1) at the moment there is no process in place for this to happen
2) there is likely to be an initial consultation before being introduced.
In general, where a member has purchased an annuity, this would have been suitable at the time the advice was provided and may well remain so for the majority. It is accepted however, that for some people this may seem like an attractive proposition although whether that remains so will depend upon the value available from the market.