Budget 2015: Annuity holders granted right to sell
George Osborne has confirmed that some five million existing annuity holders will be given the right to sell their contract in return for a lump sum from April 2016.
The move will give those pensioners that are currently locked into potentially poor-value annuities the same freedoms as those retiring after April, who will be able to spend their savings as they wish.
Like any other saver taking cash out of their pension, the money will be subject to tax at their marginal rate – that is, the highest rate of income tax that they pay.
Tom McPhail, head of pensions research at Hargreaves Lansdown commented: "The new pensions freedoms are immensely popular with pension investors coming up to retirement, so it's hardly surprising the government is looking at ways to extend them to people in retirement too."
"Unlocking your annuity in exchange for cash is bound to appeal to some people who want either a lump sum now or the flexibility to dip into their pension at will."
The change could be particularly beneficial for people with particularly small annuities – getting a cash lump sum now could be more meaningful than an annuity that only pays out a matter of pounds a week.
However while the move theoretically levels the playing field between those that have and those that are yet to retire, experts are warning that savers will get back less than they expect.
Making a bad deal worse
Steve Wilkie, managing director at retirement specialists Responsible Life warned that however poor value your annuity is, selling it could be a case of making a bad deal even worse.
"Someone has to be willing to buy the annuity, and any institutional investor is going to expect to make a profit. That means they're unlikely to buy the annuity at a fair market value, and the loser is ultimately going to be the pensioner who needs the money the most. The reality is, that sticking with what you have, is likely to be a lot better than the cash lump sum you might get if you choose to sell."
Andy Tully, pensions technical director at MGM Advantage agreed that the area is a potential minefield: "The issues are complex but I can't see how exchanging an income for cash up-front at a significant discount would make sense. From our calculations you could lose 30% or more of your potential income because of costs and upfront tax. It would seem crucial that people are compelled to take advice before making this decision."
As yet it remains unclear how a market for second-hand annuities would work and more detail is unlikely to be available until the consultation process has been completed.
Hargreaves Lansdown has suggested that annuity contracts are unlikely to be unwound; instead, it is likely a new investor would pay a cash lump sum in exchange for the lifelong income stream. Potential investors might include institutional investors such as insurance companies, rather than individuals.
It is also possible that pooled annuity funds could be created, with multiple contracts being bundled up and sold in chunks to multiple investors.
McPhail added: "There are significant practical obstacles to overcome and this scheme may never get off the ground, however the consultation presents an opportunity to explore whether it is possible."
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.