From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract.
The Chancellor first announced the pension reforms in his 2014 Budget, meaning that from April anyone over the age of 55 will be able to take their entire pension pot as a lump sum, or place it into drawdown to use the proceeds more gradually.
Currently people wanting to sell their annuity income to a willing buyer face a 55% tax charge, or up to 70% in some cases. The government will remove this charge, so people are taxed only at their marginal rate.
Before the Budget, Chancellor George Osborne said:
"There are 5 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.
"So I am going to change the law to let that happen, and make sure we have the right guidance in place.
"People who’ve worked hard and saved hard all their lives should be trusted with their own pension."
Today, Osborne commented:
"We will give five million pensioners access to their annuity.
"For many an annuity is the right product, but for some it makes sense to access their annuity now.
"So we’re changing the law to make that possible.
"From next year the punitive tax charge of at least 55% will be abolished. Tax will be applied only at the marginal rate.
"And we’ll consult to ensure pensioners get the right guidance and advice."
Karen Bennett, Sales and Marketing Director, Commercial Mortgages, Shawbrook Bank, said:
“Most pensioners across the country will now be considering the best way to use their new freedom and it is likely that many will decide that property investment yields are a more attractive investment - however, they should exercise caution with their life’s savings.
“Buy-to-let may be considered a more flexible option than an annuity but needs very careful consideration and time investment to ensure the property will deliver the required returns and long-term capital gain. It’s also worth noting that the on-going maintenance and management of any BTL is a specialist skill. New clients may be caught up in the excitement of this new freedom, but we urge brokers to counsel caution and make the demands of property investment clear.”
John Warburton, Executive Director of Distribution at Prudential UK, commented:
“We welcome considered proposals that could give customers greater flexibility in managing their own financial affairs. We believe that there are certain circumstances in which customers might find it attractive to be able to sell their annuity in payment, and circumstances in which insurers or other parties could be interested in purchasing an annuity income stream.
“For many customers, selling their annuity income could be the wrong decision for their circumstances and they will need to consider all the issues involved very carefully, including any tax implications. In addition to the new guidance process, annuitants are likely to benefit from advice to ensure that they appreciate the real value of their annuity income in their current and likely future circumstances.
“The Government is therefore right to recognise that these will be complex and difficult decisions for consumers. This, plus the considerable challenges for the industry in implementation, mean that a careful and full consultation is required. Naturally, as a leader in the sector, we plan to fully engage with that process.”
Steve Wilkie, MD at retirement specialists Responsible Life, added:
"On the surface, it looks like an escape route out of low-value annuities. And being able to gain immediate access to all their retirement money will be attractive to many pensioners - particularly those who bought annuities in the last few years just before the radical pension changes were announced.
"Unfortunately, this is an escape route fraught with danger and booby traps. And for most people, choosing to sell their annuity, however poor it is, could be a case of making a bad deal even worse.
"Someone has to be wiling to buy the annuity, and any institutional investor is going to expect to make a profit.
"That means they're unlikely to buy the annuity at a fair market value, and the loser is ultimately going to be the pensioner who needs the money the most.
"The reality is, that sticking with what you have, is likely to be a lot better than the cash lump sum you might get if you choose to sell."
