Selling your annuity: Is Steve Webb's plan feasible?
When George Osborne announced the pension freedoms in the March Budget, many wondered whether people who had already purchased annuities would be able to take advantage of them or if their annuity contracts would exclude them.
Whenever changes are made, a line needs to be drawn that separates people who are eligible and ineligible. For the pension freedoms, it was stated that people who access their pension after April 2015 would have more options with their fund, while those who had already purchased an annuity would still be bound by that contract.
But in the following months, Steve Webb, the pensions minister, announced that he wanted as many people as possible to have control over their money and that many people purchased poor value annuities because it was their only choice when they retired.
If this proposal became reality, the decision would be radical and could have a huge impact on other industries too. Annuities are bound by contracts, and the ability to leave would not be because of a clause but because of a decision that retrospectively provides the get-out option to clients. This could open the doors for consumers in other industries to try and escape contracts on the grounds that more attractive possibilities have subsequently become available.
How will it work?
It could be assumed that cashing out would be as simple as a provider refunding a pension, minus fees and the amounts already paid out as income. At face value this appears to be a simple, perhaps obvious, option, but it has various pitfalls. Firstly, the cash value will need to be agreed by both the provider and the policy holder, and advice will usually be needed to ensure that the amount on offer is actually fair - the cost of which could be prohibitive for many retirees, leaving the less well-off vulnerable to selling their annuity for low prices.
The actual idea though appears to be to provide a second-hand annuity market, so people can buy the annuity payouts for as long as the original owner is alive. The payments will stop when the original - not the new - policy holder dies. This makes a second-hand annuity risky, as no one can predict how long a person will live, although it may be an attractive proposition to investors to buy annuities in bulk and collect the income.
Cashing out annuities would involve a number of complex details, and even if this proposal was accepted by the next government it would still take a long time to implement. Will annuity prices increase as providers try to minimise their losses if people can leave? What would the tax implications be on the cash sum received for selling an annuity? Would there be restrictions on who can sell their annuity?
Whether or not the prospect of reversing an annuity could even work is unknown, and for people who have lost out on the pension freedoms by retiring slightly too early it may seem like an attractive proposition. Nonetheless, 2014 saw a lot of new changes to pensions and there needs to be a focus on ensuring the new options are clarified, as new legislation could bring further confusion.
Would you consider selling your annuity, or purchasing a second-hand one, if the opportunity arose? Let us know with a comment below.
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