Save, make, understand money


Four things to consider before selling your annuity

Joanna Faith
Written By:
Joanna Faith

Pensioners will be able to sell their annuities from next April. If you’re still deciding whether to trade in, here are four factors to consider.

Retirees who purchased poor value or unsuitable annuities will be able to sell them back from next year under newly-announced government rules.

According to Treasury figures, an estimated five million people will be able to trade their future annuity income for a cash lump sum from April 2017.

The new rules are an extension of the pension freedoms introduced in April 2015 which enable savers aged 55 and over full access to their pension savings.

Extending the freedoms to existing annuity holders may seem logical but in reality, selling an annuity might not be the best decision for all pensioners.

“A survey we undertook with YouGov suggested that less than 20% of people ‎would consider selling their annuity, with the major factor for this reluctance being a concern they would not receive value for money,” says Adrian Walker, retirement planning manager at Old Mutual Wealth.

“The option to sell your annuity is not a bad one in principle,” he adds.

“However, it is important that people remember that the market for second hand annuities is likely to be one in which buyers hold all the information and sellers are in a relatively weak position.”

Andrew Tully, pensions technical director at Retirement Advantage, says people might not receive the sort of cash they expect once they actually do the sums.

“While some people may find the idea attractive, those who have been sold a poor value annuity and then trade it in won’t necessarily get better value.”

Here, Tully suggests four things to consider before you sell:

  1. Your current health and life expectancy, which will determine the value of the annuity to trade

The buyer for your annuity will consider your current health and how long they think you will live. This may be different to when you originally bought the annuity if your health has since deteriorated, and you will probably need to complete a medical questionnaire. This will all help the buyer work out how much income they think is left from your annuity, and therefore the value they will place on it.

  1. The cost of the trade

Of course, these things aren’t cheap, and there will likely be substantial costs for doing a deal. For example, there will be costs for the medical, administration and profit for the buyer. That’s before you even begin to think about the tax you will need to pay on the cash lump sum, which will be calculated at your income tax rate. This could all push you into the higher rate of tax (40%). The government has also said that for certain value annuities, possibly around £30,000 or more, you will need to get (and pay for) financial advice.

  1. How to replace the income stream from the annuity

You need to think about how you will replace the income stream from the annuity. It may be you have other sources of income, from another pension for example, so you are less reliant on the income from the annuity. But if you are reliant on it, and you trade your income for a cash lump sum, you won’t be able to change your mind. Also consider carefully if you have any valuable guarantees, either with the annuity rate originally offered, or perhaps any spouse or dependent pension built into the plan, as these will also disappear if you trade.

  1. Do you receive means-rested benefits?

Be careful if you are in receipt of means-tested benefits. Although there are no plans to prevent you selling your annuity income for the cash, the government has not yet confirmed its position on how it will view people who do trade an annuity and the impact upon means-tested benefits and/or social care an individual receives.