PensionsMay 18 2016

Ten questions for clients who want to sell their annuity

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Ten questions for clients who want to sell their annuity

Aegon has produced a ten top tips for those considering selling their annuity when the secondary annuity market launches next year.

Reforms unveiled in December will allow people currently drawing annuities to sell their contracts from 6 April 2017, extending at-retirement reforms announced in the Budget two years ago.

Advice will be compulsory for those with larger pots, bu t last month FTAdviser reported advisers were shunning talks to develop an annuity re-sale market over fears of future mis-selling claims, in what could be a fatal blow to the government’s plans.

But the Department for Work and Pensions and the Financial Conduct Authority recently confirmed they will not force advisers to help clients sell their annuities.

To help advisers guide their clients through some of the issues they need to consider, Aegon has produced a checklist they can share to get them thinking about their options.

Key points to consider:
Are you eligible?Check with your provider whether you have an annuity that they will allow you to sell. Not all will offer this choice.
Is your annuity legally in your name?You may find it was purchased by trustees of a previous pension scheme. Check, as you’ll need to ask the trustees to change it into your name before you can consider selling it.
What would you live on if you sold your annuity?Make sure that you have steady additional income on top of the State pension.
Is your annuity set up to continue to your spouse or dependent if you die before them?If so, what will they live on if you’re not around? You should discuss this with them and get their permission before you can sell.
Would you like to take your income more flexibly?If so, instead of cashing in your annuity, sell it in return for transfer into a flexible drawdown plan, taking an income and only paying income tax on the amount taken out.
How is your health?You’ll be required to provide medical evidence as anyone buying your annuity will need to estimate how long you’re likely to live as they’ll stop receiving instalments when you die. If you’re in poor health or have a condition that shortens your life expectancy, the amount offered will be reduced.
What’s your tax plan?If you sell your annuity for a lump sum, you’ll pay income tax, potentially pushing you into a higher income tax rate band. A large lump sum could make you a higher or additional tax payer meaning you could lose up to 45 per cent.
What about the costs involved?You will be asked to cover administration costs and pay for providing medical evidence.
Have you thought about advice?The government requires those with substantial annuities to seek and pay for advice before they can sell. If you are selling without advice, make sure you shop around as different buyers may offer very different amounts.
Have you thought about how much you’ll get?You won’t get back the amount you originally paid, less instalments received. The amount offered on selling will reflect factors including interest rates, age, health and life expectancy.

Steven Cameron, pensions director at Aegon, pointed out the government itself admits that for most people, keeping an annuity will be the right decision, while the regulator has highlighted many risks of consumers losing out.

“As many people with annuities are elderly, the regulator wants to make sure any vulnerable individuals are protected.”

Scott Gallacher, director for Leicester-based Rowley Turton, suggested consumers proceed with “extreme caution” as the market is unlikely to be a good deal for most.

“It has been estimated that those selling their annuity may lose up 25 per cent in value due to all of the underlying costs and the profit demanded by any purchaser. This is best likened to having bought a new car and then looking to trade it in a few weeks later, for example, you lose a small fortune as soon as you drive off the forecourt.

“But with most people having insufficient retirement funds to start with, I worry that many people will take the immediate benefit of a cash sale over the long term value of their annuity income,” he added.

“Consequently I suspect that within just a few years we will see many people regretting having sold their annuities and this will trigger an avalanche of miss-selling claims against the advisers and companies involved.”

ruth.gillbe@ft.com