Secondary annuity market: 10 things to consider before you sell
From next year, pensioners who previously bought an annuity will be able to sell their guaranteed income to a third party buyer as part of new rules to extend pension freedoms. Before you sell, Steven Cameron of Aegon lists the 10 things you should consider.
In April 2017, the new secondary annuity market will give many individuals the option of selling future annuity instalments to a third party buyer in return for a cash lump sum, or a transfer into a flexible drawdown policy from which they can take income as and when they need it.
The Government has said that for most people, keeping an annuity which is providing a guaranteed income for life will be the right decision. As many people with annuities are elderly, the financial regulator – the Financial Conduct Authority – wants to make sure any vulnerable individuals are protected.
Here are the key things for you to think about before considering selling your annuity:
1) Are you eligible?
Check with your pension provider whether you have an annuity that they will allow you to sell. Not all will offer you this choice.
2) Is your annuity legally in your name?
You may find it was purchased by trustees of a previous pension scheme. If you’re not sure, check as you’ll need to ask the trustees to change it into your name before you can consider selling it.
3) Ask about the costs to sell
You will be asked to cover administration costs and pay for providing medical evidence.
4) What would you live on if you sold your annuity?
Make sure that you have steady additional income on top of the State Pension.
5) Will your annuity continue after your death?
If your annuity is set up to continue to your spouse or dependent if you die before them, you’ll need their permission before you can sell. It may also be best to discuss what they’ll live on in the event of your death and make any necessary provisions.
6) Think about tax
If you sell your annuity for a lump sum, you’ll pay income tax, potentially pushing you into a higher income tax rate band. A large lump sum could make you a higher or additional tax payer meaning you could lose up to 45% to the taxman.
7) Would you like to take your income more flexibly?
If so, instead of cashing in your annuity, you could sell it in return for transfer into a flexible drawdown plan. You can then take an income when you wish and only pay income tax on the amount you take out, often cutting your tax bill.
8) How is your health?
You’ll be required to provide medical evidence as anyone buying your annuity will need to estimate how long you’re likely to live as they’ll stop receiving annuity instalments when you die. So if you’re in poor health or have a condition that shortens your life expectancy, the amount you’re offered will be reduced to reflect this.
9) You won’t get back the same amount you originally paid
The amount you’ll be offered on selling will reflect a number of factors including current interest rates, your age, health and life expectancy.
10) Getting advice will give you the best deal.
The government will require those with substantial annuities to seek and pay for advice before they can sell. If you are selling without advice, make sure you shop around as different buyers may offer very different amounts.
Steven Cameron is pensions director at Aegon