Selling your annuity? It might not be worth what you think

Please note: The information in this article was correct at the time of writing. Since then, the government has scrapped plans for a secondary annuity market. Please visit our blog to find out more.

When the pension freedoms were announced in the 2014 Budget, a big question was whether people who already had annuities would be excluded from them. It seemed potentially unfair to stop a person having freedom over their pension if they had only purchased an annuity the day before the announcement. Steve Webb, the pensions minister, later suggested that people should be able to sell their annuity for a cash lump sum, and in this year’s Budget the chancellor confirmed that selling your annuity income will be possible from April 2016.

Whether or not selling an annuity income is the appropriate decision for a person depends on their circumstances, but it needs to be ensured that people are aware of the value of their fund. The proposal is not for a refund for an annuity – which would allow you, in principle, to simply receive the remainder of your fund. Instead, your annuity income will be paid to someone else, and you will receive a lump sum that estimates what those payments will be worth.

This creates complications. The only reason anyone will want to buy an annuity is to try to make a profit from it, which means they will want to purchase it for as little as possible. However, they will also have their own costs to consider, such as a medical check of the annuitant because once that person dies the payments stop. Buyers may also take the cautious view that people are likely to sell if they are in ill health. All of this reduces the amount that a buyer would or could pay, which ultimately means a seller will have offers much lower than they were expecting.

Yet the expectations for what would be received for selling annuity income appear to be unrealistically high. We conducted a survey of 1,000 people and asked how much money they would want for their annuity if they had one and chose to sell it. Two-thirds of people expected 90% or more, and 14% would want no less than 80%. Taking everything into account, the realistic figure is likely to be closer to 60%, if not lower.

We also asked people why they would want to sell. 431 said they wouldn’t, but 50% of those who would said they’d consider selling if their annuity income was too small, while 22% would want to make a significant purchase.

It's also important to remember that being allowed to cash in doesn’t mean the market will exist for someone to buy the annuity. The government has started a consultation, but many questions need to be answered before this proposal is fully understood.

Would you sell your annuity income for a lump sum? Let us know with a comment below.

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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