Budget 2015: Cash for annuities
Despite claims this “will not be a budget of pre-election gimmicks or giveaways”, the first major leak ahead of Wednesday’s Budget offers retirees who have already bought annuities the chance to sell them for a cash payment.
The measure is expected to be introduced from April 2016, allowing existing pensioners the opportunity to benefit from the same pension ‘freedoms’ as those being introduced for new retirees on 6th April this year.
According to reports, it will be possible from April 2016 to cash in an existing annuity – the financial instrument used to convert a pension pot into a guaranteed income for life – without the punitive tax charges currently applied for doing so.
Instead, cash payments in return for annuities will be subject to income tax at marginal rates, based on the amount of cash you withdraw from the subsequent pension pot (and your other taxable income in that tax year).
This is not expected to be a widely adopted option for people who already own annuities.
It would involve selling the guaranteed income from your annuity back to the pension provider, another insurance company or any third-party willing to buy the income stream.
The cash would then be within a pension pot subject to the same freedom and choices which become available to all pension pot owners over age 55 from this April.
The amount you would receive in return for your annuity would depend on your life expectancy, which might have deteriorated or improved since the decision was made to buy an annuity.
Fees and other charges would naturally reduce the amounts paid, and it is reassuring to see the Treasury plans to work with the Financial Conduct Authority (FCA) to ensure consumers have access to appropriate support and advice.
It will be really interesting to see the details of this announcement when it is made and whether a market for second-hand annuity sales can be developed within the space of twelve months.
We believe it is right that existing annuitants gain access to the new pension choices being made available to those who are yet to buy an annuity with their pension pot.
However, buying an annuity with some or all of your pension pot remains the best way to insure against the risk of living too long in retirement.
It is often the most suitable retirement income option for the majority of retirees who need a stable, guaranteed income each month during their retirement.
Choosing to sell your annuity back to the insurance company is not a decision to take lightly. Please seek expert independent financial advice before rushing into any lasting decisions.