October 2016 update
Plans to allow retired workers to reverse their pension arrangements and receive a cash lump sum have been scrapped.
Here’s what you need to know about the decision to abolish plans for a so-called secondary annuity market.
Annuities have generally always been seen as a type of financial product that, once set up, can’t be undone.
An annuity promises to pay the customer a certain rate of monthly income for the rest of their life, in return for a cash lump sum – usually paid out of the customer’s pension fund.
Dispelling pension myths
Until now, there has been no way of getting your money back on an annuity if you change your mind at some point down the line.
However, in 2015 the government announced plans to introduce a new system of secondary annuity sales. This means that, in some circumstances, annuity holders will in fact be able to trade in their annuities for a cash lump sum.
This policy is designed to level the playing field for people who retired before last year’s pension reforms were introduced and who therefore faced little choice but to buy an annuity.
What is an annuity?
When will second-hand annuity sales begin?
Although the change was originally due to be introduced this year, the latest date given by the government is April 2017.
The delay is intended to give civil servants, annuity companies and other financial firms time to work out exactly how the system will operate.
Who should sell their annuity?
When this policy was introduced, the government said that it would probably only be suitable for a minority of people to sell their annuities.
An annuity offers a guaranteed income stream until death, and it is unlikely to be in most holders’ interest to give this up.
However, if someone’s financial circumstances have changed – for example, if they have a new source of dependable income – they may prefer to sell their annuity and get the benefit of a lump sum payment.
Equally, people who felt they were forced to buy an annuity and who have adequate other pension income might be interested in selling.
One of the key considerations will be what kind of deal is being offered. The sale price of an annuity is likely to be far less than what was paid for it, and middlemen are likely to impose their own fees on such transactions.
The pros and cons of annuities
Who will buy second-hand annuities?
It is not yet clear what will happen to the sold annuities, or what level of demand there will be.
The government says that it expects institutional investors to buy them: so companies could buy up large numbers of second-hand annuities which will give them a guaranteed income stream for a period of several years.
Alternatively, the annuities could simply be sold on to other individuals. In this case, the new annuity holders might have to match the sellers to some extent – for example in terms of age, gender and/or medical history.
Don’t rush in
The message from government and financial experts is that people shouldn’t rush to sell their annuities: once an annuity is sold, the income guarantee it offers is lost. If you are considering this course of action, be sure to do your homework and seek advice in advance.
Find out how the Saga Annuity Service, provided by Legal & General, may be able to help you get more retirement income from your pension.