Sell Your Annuities
What is an annuity?
An annuity is a financial product sold by an insurance company which guarantees to pay the holder a certain amount of money every month for the rest of their life.
How much will the annuity pay?
This depends on a number of factors, including how much money is in your pension pot, how old you are when you buy your annuity, what annuity rates in general are like when you buy it, and what the state of your health is.
What is happening to the rules around annuities?
Until April 2015, most people had to use their pension funds to generate an income for their retirement. In the majority of cases, this meant buying an annuity. But changes in the law mean that there is no longer the obligation to generate an income from your pension fund.
Why have annuities been criticised?
Increasing longevity and falling interest rates since the financial crisis of 2008 mean that annuities over the past few years have paid out less than in the past. Another issue is that an annuity contract is generally irreversible: once you have bought one, you cannot cash it in or try to get a better rate. You need to be certain that a secure income in retirement in exchange for your pension funds is your preferred option. A lot of annuity customers have also automatically taken the annuity on offer from the provider of their pension fund, who may not always provide the best income. If opting for an annuity it always pays to shop around to see whether another annuity provider may offer a better rate, especially if you are in poor health.
Do annuities have anything to recommend them?
Despite these issues, buying an annuity could still be the right thing to do in many circumstances. They offer a guaranteed income which will not fall if, say, the stock market plunges. For those who wish to take no risk with their retirement income and want certainty over the level of income they will receive, an annuity may still be the best option. The 2015 law changes mean that more people are likely to keep their pensions invested after they retire, or buy assets such as buy-to-let property: but though these options give greater flexibility and potentially better death benefits, there is a risk of losing money. Also, an annuity means you will never run out of money: if you take an income from investments, there is a chance you will exhaust your fund before you die.
What kinds of annuities are available?
There are numerous types of annuity, and which one will suit you best depends on your personal circumstances.
Index-linked or escalating annuities
These pay an increasing amount of money every year in line with inflation or by a fixed percentage. The trade-off is that in the early years they pay less than level annuities, where the income stays flat for the rest of your life.
Joint-life annuities
These are aimed at couples. The annuity will continue to pay out after the first partner dies, unlike single-life annuities. From April 2015, it will be possible for a joint life annuity to be paid to anyone, rather than specifically to a spouse or financial dependant.
Enhanced annuities
This type is for people who have health conditions, such as heart disease, diabetes or high-blood pressure, which could reduce their life expectancy. Enhanced annuities pay higher income than normal annuities. Some lifestyle choices such as smoking may also give an increased rate.
I want to sell my annuity for cash - how do I get the best deal?
The first thing is to be sure that you can manage without the regular income. Whilst a lump sum is obviously attractive, you will have been used to having the income coming in and you need to be sure you can live on a reduced income. With an annuity of 25.45 per month that is probably not much of an issue, but thosewith larger annuities need to be careful not to be tempted by the thought of a cash lump sum and then find they cant manage on their reduced income. Those receiving benefits such as housing benefit or pension credit should be especially careful, as it is very unlikely that your benefit would be increased even if your income fell as a result of selling an annuity. Also, if you receive a large lump sum in payment, your benefits could be reduced. The next question is working out what wouldbe a fair price for your annuity. A simple way of looking at it would be to ask yourself what payments you are likely to receive for the rest of your retirement.
To give some round numbers, if the actuaries thought that you were likely on average to receive the annuity for another ten years, then you might think it is worth 3054 (25.45 a month times twelve months times ten years). But the amount you would be offered is likely to be considerably lower than this. There are a number of reasons why you might get less than you expect. There will be costs to the company which provided your annuity in handling the transaction and they are allowed to deduct these from the value of your policy. There will also be costs to the company which buys your annuity (which could be the same firm but could be someone else) and they will knock these off any offer that they make. These could include the costs of any new medical checks that they might want to undertake, the costs of advertising their services, their own profit margin and so on. Another reason why you might get less than you expect is that the insurance industry worries about something called adverse selection this is the risk that the people who are willing to sell their annuities might be the people who know that they are in poor health.
For this group, a cash lump sum may be preferable to an income stream that lasts as long as they live. Although the buyer will ask health questions, the seller of the annuity knows more about their health than the buyer, and theres a risk that annuities which are put up for sale will continue in payment for less time than an average annuity. You ask an important question about whether you should sell to your provider or on the open market. In my view there is no question that you should get quotes from as many people as possible. Its very hard to know what the right price is for an annuity, but at least if you have several offers then you can choose the best one if you decide to proceed. The potential lack of competition in this market is another reason why you might not get as much as you expect.
The Government has introduced a number of measures to try to protect consumers, as it is concerned that people may not get value for money. One such measure is that anyone who makes you an offer has to tell you what it would cost to buy the annuity that you have today on the open market. This will give you some benchmark as to the underlying value of your annuity. There is also a requirement to take financial advice before selling your annuity if it is above a certain size. The Government has yet to specify this threshold, but it generally regards annuities worth more than 30,000 as being important enough to be worthy of seeking advice. This does not apply to you, and paying for advice would probably not be cost effective for a relatively small annuity such as yours.
But you can contact the Governments free Pension Wise guidance service if you want someone to explain in more detail how the process will work. In terms of how you can take the money, you can take it all as cash in a lump sum or you can invest it in a new product such as a drawdown account and take the money gradually. In either case you should expect to pay tax at your marginal tax rate - nil on less than 11,000, 20 per cent, 40 per cent or 45 per cent - on the money when it is finally withdrawn. The Government explains income tax rate bands and personal allowances here. Finally, you should be aware that taking the money as a lump sum could mean you end up paying more in tax than if you had continued to take regular payments under the annuity, depending on what other taxable income you have.
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