After much speculation, the Government has finally unveiled plans for the secondary annuity market, a move that will offer the chance for more than 5 million people to sell their annuity and benefit from the same pension freedoms as everyone else.
The Government has confirmed that the secondary annuity market will be open for business from 6 April 2017, as part of its decision to extend the pension freedoms so more people can benefit. From that point on, the tax restrictions for those looking to sell their annuity will be removed, giving those with an existing annuity (which number around 5 million), and notably, anyone who purchases an annuity in the future, the freedom to sell it back for an upfront cash sum.
The sale will effectively mean that they forfeit their right to a guaranteed future income, but for some people, the sale could be worth it. This is particularly the case for those who may have had no option other than to buy an annuity but are now left with a derisory income – in this kind of scenario, and in many others, being able to receive a cash lump sum could be far preferable, with the changes giving them the freedom to use the capital as they wish.
In a nutshell, the new rules mean that those who already have an annuity will have the same freedoms as those who are yet to reach retirement: they can take the annuity as a lump sum, or place it into drawdown to use the proceeds more gradually, both of which are options that have been denied to them until now.
Quite simply, pension annuities belonging to an individual and held in their own name will be eligible for the new freedoms, but further details on how the new secondary annuity market will work have been released, too. For example, all UK-based annuity purchasers and intermediaries are required to be regulated by the FCA, and all annuity providers will be given the choice to buy back an annuity, subject to robust safeguards.
The Government also intends to introduce a comprehensive consumer protection package to ensure that people make informed decisions about their savings. This will include the extension of Pension Wise to cover the secondary annuity market, the requirement for individuals to seek financial advice for annuities worth above a certain threshold (to be decided at a later date), and asking the industry regulator, the FCA, to put in place a consumer protection framework, which could include risk warnings and ways for consumers to understand the fair value of their annuities (ideally through the use of a simple online tool).
It's widely assumed that, for most people, selling their annuity won't be the right decision, as it effectively forfeits their chance to receive a guaranteed lifetime income. However, some people will undoubtedly find it beneficial – they may want to sell an annuity to provide a lump sum for relatives or dependants, for example, perhaps in response to a change in circumstances, or to purchase a more flexible pension income product instead – but it's still vital to be sure you're making the right choice.
It's for this reason that the requirement for financial advice has been so widely welcomed, as it'll hopefully mean that more people make the right decisions according to their own circumstances – essentially, giving them the freedom to decide how best to spend their pension pot, much like more recent retirees have been able to do.
"The new pension freedom reforms are crucial in allowing people to make the most of their hard-earned savings," commented Minister for Pensions Baroness Altmann. "Keeping an annuity will still be the right decision for the majority of people. But some were forced to buy annuities in the past that may not have been suitable for them – and I am delighted that this reform will allow more people greater choice and the opportunity of a more flexible income stream."
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