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Annuity sales – the latest development in pension reform

The Treasury has this week given the green light to proposals made in last spring’s Budget to give millions of annuity holders the option of cashing in their policies.

Until recently, annuities were the main way of turning lifetime pension savings into an income for retirement and they have generally been viewed as irreversible.

The launch of a secondary annuity market

But the government’s new announcement that a secondary annuity market will launch in April 2017 has changed all that. The change of heart has been driven by the pension reforms which were introduced in April of this year: they mean that anyone takes their pension (usually at age 55 or older) has greater choice over what to do with their money.

They may still buy an annuity if they wish, but it is now much easier to leave funds invested in the stock market or even to withdraw cash, for example to generate returns through the likes of buy-to-let property or peer-to-peer lending.

The reforms, however, do not apply to people who had already “crystallised” their pensions by purchasing an annuity before April 2015. So to be fair to this group of around 5 million people, ministers have decided to allow sales of existing annuities.

To sell or not to sell?

The government, however, does not expect most people to take advantage of this offer. This is because it thinks that in the majority of cases, it will be most appropriate to hold onto the annuity and continue to benefit from the guaranteed lifetime income it offers.

But analysts say that, depending on the size of the lump sum that customers can get for trading in their policies, those who have relatively small annuities might well benefit from cashing them in. If the income generated does not have a big impact on someone’s standard of living, for example, they may decide that a one-off lump sum could be more useful.

Sellers to be obliged to seek financial advice

Since the plans were announced back in March, there have been numerous warnings about the potential for annuity sellers to make poor decisions: after all, once a policy is sold, the guaranteed income it has provided is lost for good.

The Treasury says, however, that the companies involved in purchasing annuities on the secondary market will be regulated to ensure there is no consumer detriment. This also means that anyone who gets a raw deal will find it easier to seek compensation.

Ministers also say that in some cases at least, sellers will be obliged to seek independent financial advice before they carry out a transaction. The government-backed Pensionwise service will also be available to offer guidance.

How will the market work?

All that remains to be seen is how buyers will decide what to pay for old annuities. It is thought that the income stream of each sold policy will remain attached to the original holder – so when that person dies, it will stop paying out. This raises some interesting questions about whether purchasers will then be able to re-sell these annuities – at a profit – to other individuals.

However the market ends up working, though, it is certain that anyone who considers selling their annuity needs to be absolutely clear about the pros and cons: this will almost definitely not be the kind of deal where you can change your mind at a later date.