All change for annuities
From April 2017 new rules will give individuals who have exchanged their pension savings for an annuity, the option of selling their entitlement to income in exchange for a cash lump sum, flexi-access drawdown or a flexible annuity.
The Government is still working through the detail but this article may help you to understand the options and possible consequences.
In the 2015 Budget, the Government announced its intention to reform annuities by introducing legislation for April 2017, allowing individuals to sell their rights to annuity income in exchange for a cash lump sum. Other options have been suggested, such as transferring money into flexi-access drawdown or a flexible annuity, although these are still under consultation.
Although an annuity is normally the best way of receiving a guaranteed income for life, the Government feels that selling an annuity could be a good option in some circumstances, such as where a person’s life expectancy is shorter than expected, or if the annuitant feels the money could be better invested. This step is also consistent with the Government’s other pension freedom changes introduced in April 2015.
The Government has also suggested that it may allow the redirection of the cash lump sum into a plan which offers a more flexible income, such as flexi-access drawdown, although the detail is still being worked through.
What does selling an annuity really mean?
In real terms, the annuity is not actually sold. The annuity remains in the name of the original annuitant. However, the income is reassigned to another individual, the buyer, in exchange for a cash lump sum. The buyer could be an individual or a firm. Some firms are expected to buy up annuities and repackage them to be sold to other customers – effectively a ‘tertiary annuity market’.
How will it work?
To sell an annuity, it is expected that an intermediary regulated by the FCA would need to manage the process and aim to get the best offer for the annuity being sold. A sale will depend upon a buyer being available and prepared to buy it.
The Government has not yet confirmed how the process will work. However, we understand that the seller would receive a quotation in a standard format or a series of quotations from a Financial Adviser, and also information about the numbers of buyers they have access to.
The Financial Conduct Authority has confirmed that for annuities above a certain value regulated financial advice must be sought before an annuity is sold. This is consistent with our view that customers should be fully informed about the options and risks before making such a big decision. Naturally, the Financial Adviser will recommend whether the sale is in the seller’s best interests. The seller will have a period of 14 days to review their decision, but after this point the sale will be irreversible.
The Government has not yet confirmed the value at which financial advice will be mandatory, so we are unable to provide more information at this stage. However, we would recommend customers seek advice regardless of the size of an annuity.
We also recommend customers contact Pension Wise, the Government’s free and impartial guidance service. Alternatively, the following Q&As might also be of help.
PO Box 10404
Ashby de la Zouch
Telephone: 0800 138 3944
A Financial Adviser will probably charge a fee for their advice and there may be additional charges for arranging the redirection of income.
HM Revenue and Customs are still consulting on how a cash lump sum will be taxed, so we cannot provide a definite answer at this time. Our current understanding is that the payment would be taxable.
A Financial Adviser should aim to find the best deal, but the offer received may be less than all the income which the annuitant might expect to receive. This is a complicated subject and should be discussed with a Financial Adviser.
The price that a buyer will be prepared to pay for an annuity will depend on many things, including the annuitant’s age, gender and state of health. It may be necessary for them or their General Practitioner to provide the buyer with this sort of information, and they may even need to attend a medical examination – but this will be at the discretion of the buyer.
If a buyer cannot be found, the annuitant will continue to receive a guaranteed income for life from their annuity provider.
At the moment we can’t give a definitive answer as to which annuities may be sold.
The Government and our regulator, the FCA, have yet to confirm this information. However, our current understanding is that annuities held in the name of an individual can be sold. This would mean annuities in the name of pension schemes or trustees are excluded, although this may change in future.
Our current understanding is that any beneficiary of the policy will need to agree to the sale.
So if an income is payable to a spouse or civil partner on the death of the first life, they will need to agree to the sale and will receive no guaranteed income when you die.
Once the annuity is sold, this is irreversible. So, the implications need to be carefully considered. Here are some examples:
- How the guaranteed income can be replaced.
- Any additional tax which will need to be paid on any lump sum received.
- Any tax on income received will depend on where a cash lump sum is invested.
- Any valuable guarantees would be lost which may not be easily replaced, such as a guaranteed annuity rate.
- How this decision might affect other family members.
- The impact on any means-tested benefits being received now or in the future.
There’s still a lot of detail awaited, but broadly the option to sell an annuity is a valuable option, especially if there’s a change in personal circumstances.
However, great care needs to be taken before making such a big decision, especially since this is irreversible. Selling an annuity may have wider implications and it’s essential that professional financial advice is sought, even if future regulations will not require it.
In addition, annuitants should be particularly vigilant as the access to pension funds increases the risk of individuals being exposed to fraud and pension scams.
We will continue to update you in Oracle as and when we receive more information.
For more information on the Secondary Annuity Market, please visit our website at: www.pru.co.uk/existing-customers/products