5m pensioners will get to cash-in poor-paying annuities
The government has confirmed plans to allow existing annuity holders to sell their annuities in return for a cash lump sum from April 2016.
While it is currently possible for individuals to sell on their annuity income they incur a prohibitive tax charge for doing so - 55% in most cases but it can be as high as 70%.
This charge will be removed so people will only be taxed at their marginal rate.
They will then be able to do as they please with their pension savings, just as those approaching retirement will be able to do so from this April under measures announced in last year's Budget.
Their options include being able to draw down from their defined contribution pension pots a bit at a time or taking their pension as a lump sum.
Announcing the annuity reform, Chancellor George Osborne said: "Most people will probably decide to hang onto their annuity, but many may have good reasons to want to consider selling it on.
"For most people, sticking with that annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose – the same freedom we are offering those approaching retirement in April this year.
"So I am going to change the law to let that happen, and make sure we have the right guidance in place.
"People who've worked hard and saved hard all their lives should be trusted with their own pension."
How will the process work?
When an individual has found a willing buyer, their annuity company will continue to make payments during the customer's lifetime but once a sale has been agreed it will "reassign those payments to the purchaser". So the purchaser will give the annuity seller a cash lump sum in return for the income from the annuity company.
However, people wanting to sell their annuities will not have the right to simply sell it back to their original provider. And the government said it "is not minded to allow the original annuity provider to purchase, and then discontinue, their own customers' annuities".
The government will now launch a consultation into how this will work in practice and who should be permitted to purchase the annuity income.
Joanne Segars, chief executive of the National Association of Pension Funds, said: "It's clear to see how this fits with this Government's agenda for pensions but what is less clear is how savers will be protected."
She added: "The consultation would need to look at how the buy-back price of an annuity would be calculated so people selling their annuity could be assured of good value; and also consider a prescribed process for introducing buyers and sellers to avoid excess costs, which would inevitably be carried by the consumer."
The annuity sale idea has been championed by pensions minister Steve Webb and Ros Altmann, the government's older workers' advocate.
Altmann said: "I have heard from so many people who are furious that they had to buy their annuity in the past couple of years, whereas if they had been younger the new rules would have meant they could have avoided locking all their pension savings into a product they did not want."
Among the retirees that could benefit are those that need a lump sum for urgent spending needs such as paying off debts or for care. Likewise those policyholders whose annuities are only paying a matter of pounds a week may find they can make better use of a lump sum.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.