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Govt confirms cash for annuities plans

The Government has confirmed it is to launch a consultation on how to extend pensions freedoms to savers who have already purchased an annuity as part of this week’s Budget.

In a statement published yesterday, the Treasury says it aims to allow pensioners to sell on their annuities from April 2016.

The returns can then be either taken as a lump sum, or placed into drawdown.

Money Marketing first revealed last month the Treasury was considering plans to include tradeable annuities as part of the final Coalition Budget.

The Government will publish its consultation on how to establish a market for buying and selling annuities on 18 March, and has pledged to work with the FCA to introduce appropriate guidance and other consumer protection measures.

This may include extending Pension Wise to support annuity holders, although such a move would require new primary legislation.

Under the plans, selling an annuity will not unwind the contract. Instead, the provider would continue to pay the annuity payments for the lifetime of the annuity holder, but would reassign those payments to the purchaser.

The proposal will not give the annuity holder the right to sell their annuity back to their original provider, and the Government has said it is unlikely to allow the original annuity provider to purchase, and then discontinue, customer annuities.

But the Treasury says it will also seek to consult on who should buy annuity income, and says it does not consider it to be an appropriate investment for retail investors, citing the complexity and difficulty in determining a fair price.

Chancellor George Osborne says: “There are five million pensioners who are locked into annuities they have already bought. They should have the same freedoms as we have given everyone else.

“For most people, sticking with that annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose – the same freedom we are offering those approaching retirement in April this year.”

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. How will the dynamised income be taxed? What about annuitants that are over 75? What about enhanced annuities? Exciting but raises more questions than answers.

  2. No doubt interested customers can go to Pension Wise for ” guidance “

  3. Perhaps the lump sum will be taxed in the same way that a deferred state pension lump sum is taxed.

  4. Sam: Re the tax question, the full Treasury announcement (https://www.gov.uk/government/news/pension-freedoms-to-be-extended-to-people-with-annuities) says that individuals will be taxed at their marginal rate. In other words, IIUC, if your annual income plus the annuity cash-in is over £42,000-odd, you get stung for 40-45% tax. Just as if you cashed in a pension fund.

    Why anyone would do this is completely beyond me.

  5. Can anyone suggest who would actually buy a used annuity?

    Why not buy gilts and avoid:-

    Actuarial model.
    Medical underwriting
    Admin in keeping tabs on annuitant.

    The only appeal as I see it is if they are really, really cheap. Then that’s bad news for the annuitant.

    I do see one obvious buyer and that’s the life office paying the annuity. As they can just cancel the contract and reallocate or sell the underlying assets. But that’s pretty much it. One buyer for each annuity can hardly be called a market.

    If a retail fund was ever issued they could call it Daytake. (that’s an anagram by the way – no prizes for working it out)

  6. If the annuity sales proceeds are taken as a lump sum it is treated the same as full encashment of a pension fund but without the benefit of 25% TFC. What of the annuitant who used their whole fund to buy an annuity, will they be able to claim 25% as TFC as not previously used? For anyone who would thus see themselves paying HRT then drawdown would seem the sensible route. This begs the question why they did not opt for drawdown at outset, anyone coming “late to the party” will surely be disadvantaged as presumably they will sell their annuity at a discount. Hope those RWLs and reports are watertight.

  7. I hope this is also subject to the same proposed advice rules for transfers from occupational pensions and pensions that contain guaranteed annuity rates?

  8. If someone takes their annuity as a lump sum, presumably the lump sum will be taken into account when calculating elligibility for support for care home fees?

  9. It sounds like the tax situation will be the same as someone reaching retirement with a DC pot (aside from the lack of a tax-free lump sum). They can take the whole lot as a lump sum and be taxed accordingly or put it into Flexi-Access Drawdown and be taxed on what they withdraw.

    I agree that I’m struggling to see why anyone would want to sell their annuity, given that the price they will get will doubtless be pretty poor. I suppose it might appeal to a limited number of people who have a smallish annuity that is insignificant in terms of their overall finances, but who fancy a few thousand quid to fund a holiday while they’re still fit enough to enjoy it.

  10. I echo Sean’s point – this is essentially just the same as a DB transfer (in fact even more certain given that the income is in payment) and therefore involves broadly the same considerations and risks as DB to money purchase – only in this case there is a further veriable – that being what the buyer is willing to pay.

    I suspect that whilst, in theory, this all sounds very good in practice it wont be as good as the annuitant might expect AND the costs invovled could well be prohibitive for smaller ‘pots’.

  11. If I understand the principle correctly, the purchaser (an investor, a la second-hand traded endowments gawd help us?) purchases the ‘income stream’ for a lump sum payment and the proceeds are relayed back to the annuitant, who presumably, has been fully medical-checked to the gills, to ensure that they remain alive for long enough for the purchaser to hopefully recoup their investment via the regular income payments they will now receive.

    Yep, sounds fine to me (shakes head!).

  12. @Neil Walker – I think you have hit the nail on the head there. Just because something can be done does not mean it is a good idea. So much room for misbuying and mis-selling. Really not something I would want to be involved in as an adviser knowing how the lawmakers just will not make good legislation to protect buyers and sellers.

  13. @Brian – I agree with you. An accident waiting to happen.

  14. Is there any other way that this lot can find to accelerate the amount of income tax that can be collected from pensions. Please do not say that this is being done for the benefit of the annuitant/ pension receiver!

  15. If the annuitant is taxed at marginal rate on the proceeds of the sale, does this then mean that the purchaser receives the income tax free? Otherwise, there is the issue of double taxation, and whose tax code it should be taxed under. I guess all will be revealed on Wednesday.

  16. I suggest that Pedigree Foods will be a good investment. They make cat food (amongst others) and what with pension cash and now annuity cash, there will be many pensioners enjoying this delicasy in the years to come.

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