George Osborne’s changes to the pensions regime have made pensions far more flexible, something we’ve welcomed at MoneyWeek. However, one group has been left out – those who have already bought an annuity. That’s set to change – the government has officially given the go-ahead for a second-hand annuities market.
From April 2017, annuity holders will be able (if they so wish) to sell their annuities for a lump sum, taxed only at their marginal tax rate (rather than existing penal rates). The new owner of the annuity will then receive payments from the annuity provider, until the original annuitant dies. There is even talk of a “tertiary” annuities market (where annuities could be parcelled up and sold on) being in the pipeline.
Selling your annuity – particularly if you don’t feel you got good value in the first place – might seem appealing. The trouble is, many people have “unrealistically high expectations” of how much their annuities will fetch, says Michael Trudeau in Money Observer. According to advisory firm Portal Financial, two-thirds of people expect to sell their annuities for 90% of their value, but the more realistic amount is probably closer to 60% or 70%.
There’s also the problem that the main motivation for selling your annuity would be if you weren’t getting a decent income from your current set up – but small annuities are the ones that will be most diminished by costs incurred. And the chances of getting good value seem very low. “From an investment point of view, there are many risks in buying someone else’s annuity,” warns Portal managing director Jamie Smith-Thompson, “so [buyers] will want to pay as little as possible”.
The government is introducing various measures to help people make an informed decision, such as extending its “Pension Wise” guidance service, devising an online annuity valuation tool, and ensuring that (UK-based) annuity purchase companies and intermediaries are regulated by the financial watchdog, the Financial Conduct Authority. Individuals with annuities worth more than a certain amount will also be required to seek independent financial advice before selling, to make sure they are doing the right thing.
But the key issue, as Tom McPhail of Hargreaves Lansdown puts it, is that “selling an annuity will not solve the basic problem of an original poor purchase… the capital sum will only ever be at best the net present value of the future income stream”. It’s hard to see how selling your annuity will ever be a good idea except for those most desperate for the cash – and that’s hardly a good negotiating position.