A HMRC tax consultation on the secondary annuity market confirmed that up to five million individuals receive payments under pension annuities and that some 300,000 of these individuals will choose to sell their annuity.
The market will be also be available to more individuals than previously expected, including some in defined benefit schemes or with deferred annuities.
The paper said that "some of these individuals will choose to receive a taxable lump sum and these lump sums will be treated for tax purposes in the same way as taxable lump sums received under pensions flexibility more widely, by means of PAYE".
As previously stated in the Budget, the Treasury expects a tax windfall of £960 million in the first two years of the new secondary annuity market, though it also predicts a revenue loss in subsequent years meaning a net gain to the Chancellor of £665 million.
Steven Cameron, Pensions Director at Aegon, said:
“The paper paves the way for more individuals than previously expected to have this option. In a surprise new development, those receiving annuities to cover their pension from a trust based scheme may now qualify. Sometimes, trustees of workplace pensions have arranged for an insurance company to pay the scheme pension through an annuity. Here, the annuity may still be legally owned by the scheme but HMRC will allow the trustees to make changes to offer these members the right to sell their annuity. Trustees will need to consider carefully whether to do so, but where they do, it will open the secondary annuity market to more individuals than we’d previously expected. Most surprising of all, even those in defined benefit schemes where the trustees have arranged for annuities to cover pensions could become eligible.
“In addition, some individuals may have a ‘deferred annuity’ which is due to come into payment from their future retirement age. Those aged 55 and above will also be able to sell these in return for a lump sum or payment into a flexible drawdown plan.
“Whenever an individual receives a lump sum, they will be taxed on this as income tax and if the proceeds are significant, this could push them into a higher tax band meaning their actual lump sum may be a lot lower than they’d expected. If transferring into drawdown, they can spread income through their lifetime and will only be taxed when they take income.
“As the Government has highlighted, this won’t be the right choice for most. Selling an annuity comes with risks of consumers making choices they may later regret. It means giving up a guaranteed income for the rest of their life, which in some cases would have continued to their spouse.
“We expect the financial regulator, the FCA, to consult very shortly on how to make sure individuals have suitable protections in place if they are considering assigning their annuity.”
Tom McPhail, Head of Retirement Policy at Hargreaves Lansdown, commented:
"This is potentially a double win for the government, giving annuity holders the chance to exercise more control over their savings, and raising extra revenue in the process. Our own research indicates a healthy appetite for this market, though that will in the end depend on what kind of price investors are offered in exchange for their annuity income. There are still unanswered questions around the regulation of the market and how consumer protection could work; we need to make sure investors don’t end up getting ripped off by their insurance company, for some of them possibly not for the first time.’
"There are no great surprises in the tax consultation document; we’re now waiting on the FCA to publish their regulatory plans for how the interaction between buyers, sellers and intermediaries will operate. Everything has to be put in place for the market to go live in April 2017."
