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60 second read…selling your annuity

Written By:
Guest Author
Posted:
30/08/2016
Updated:
30/08/2016

Guest Author:
Martin Tilley

The secondary annuity market is expected to be introduced next year but should you rush to sell your current income?

From April 2017, it is likely we will see the introduction of a second hand annuity market.

This means that for those people who purchased an annuity before the new pension freedom rules were introduced, and who feel locked into a regime they had little choice but to enter, will have the option to sell their annuity.

The government proposals for a “second hand annuity market” will see those with an annuity exchange it for a cash sum. This was originally intended to come into effect from April 2016 but has been delayed until at least April 2017. So should people rush to sell their current annuities?

Industry statistics suggest that over six million people in the UK have an annuity but it is likely to be a very small proportion that would benefit from the sale of their annuity.

What is an annuity?

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An annuity is a regular income secured by a capital payment from a pension policy to an insurance company that takes on the liability to pay that income for the remainder of your life.

What is the likely process for selling an annuity?

In return for a single cash lump sum to the person receiving the regular annuity income payments, the purchaser will receive the future income payments for the rest of the annuitant’s life.

Who might buy an annuity?

It is most likely that it will be insurance companies and fund managers that might be potential buyers. The purchasers will be required to account for tax on the future income they receive.

If I sell, what might I get back?

This is the key and currently unknown question. A purchaser will only acquire an annuity if it is deemed to be a good investment for them. They will want to find out how long the annuity might be payable, so a medical on the person selling the annuity will be required.

The purchaser will have to factor in the risk of them dying early and the fact they are paying up front for a future income, with an unknown end date.

The cost of the medical and legal charges of assigning the policy to the purchaser must also be taken into account. Experts suggest that even if life expectancy is estimated at perhaps 12 years, a £7,000 per annum annuity might fetch as little at £57,000 as a cash sum.

This is 32% less than would have been paid out over the expected lifetime of the policy. If the annuitant’s health has deteriorated since the original plan was purchased the sum could be much less.

How will I be taxed?

Although a lump sum from the above example of £57,000 might initially seem attractive, you would pay tax on the whole amount in the tax year that you receive it. Assuming only other modest income, most of this would be taxable at 20% with some falling into the 40% income tax bracket.

If the £7,000 per annum annuity had continued to be paid to you it is likely that some of this might have fallen within your personal tax allowance and had no tax deducted and the balance into the 20% income tax bracket.

Deciding whether or not an annuity should be sold could be a complex financial and tax decision and those contemplating this would be wise to seek professional advice.

Martin Tilley is director of technical services at Dentons Pension Management