In his March budget the Chancellor, George Osborne announced a consultation into a Conservative proposal to allow annuities to be traded. Whilst we encourage freedom an choice in retirement these plans seem ill thought-out and likely to be of detriment to most.
It is assumed that most annuitants bought an annuities for the “right” reasons – amongst these would be the security of income they offer, with no investment risk. Whilst the open market option (the ability to shop around) is poorly implemented this does not mean annuities themselves are ‘broken’ simply that individuals should seek clarity on their choices and shop around when faced with retirement choices.
An annuity, in that it offers a guaranteed income shares some similarities with a Final Salary scheme. It is in fact rarely considered to be in an individual’s best interest to transfer their benefit out of a Final Salary Pension Scheme due to the valuable guarantees these schemes provide. The Money Advice Service state in their guidance:
In most cases you are likely to be worse off if you transfer, even if your employer gives you an incentive to leave your scheme.
It is likely that the offer to sell an annuity will see many times less being offered than the purchase price, the main reasons (some supposition) for this are given below, but are not exhaustive:
- Tax is levied at the annuitants marginal rate on the lump sum (may well be 40%)
- Fees will be incurred in searching for an appropriate purchaser, and sale costs
- Income paid to date will effectively be factored into the offer, as will the likely shorter period of life expectancy
- Purchasers will discount offers further to avoid being ‘selected against’, in other words is an individual selling their annuity because they know they now have an impaired life expectancy
However, gilt yields have fallen so there is an argument that a purchase of an annuity could be a cheap way to access cheap gilts. I do feel the other factors above are more significant. So taking into account the discounted offer from the purchaser, an individual would either need to accept their fund is likely to run out, or aim to generate an absurdly high return (high single digits, or even double digits).
We wait to see the final rules, and indeed they may be overturned by a change of government it seems unlikely to be in any annuitants interests; but we would be in a position to offer professional financial advice to those considering selling their annuity. The reality is that as we will charge an explicit, fixed fee, for any advice this may dissuade those looking to sell. This fee is due even if the advice is not to sell, which I think is likely, for those individuals in normal health and otherwise “ordinary” situations.
For now if you feel you require personal advice on this matter you should probably wait until later in 2015 when the rules are available, at least in draft. If you have other concerns we would be delighted to bear the cost of an initial conversation to understand your exact circumstances, explain how we work and highlight if there are any overwhelming “soft” factors that may make it more or less advisable to sell your annuity. Then, if you want us to undertake the full analysis we will charge a fixed fee, which we will discuss with you at the time, which will be dependent on the nature and complexity of the various benefits that you hold.