What is a with-profits policy and should you ever cash it in?

The government has abandoned plans for people to sell their annuity

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If you’ve bought an annuity with your pension pot, you were going to be able to sell it from April 2017 in return for a cash lump sum. However on October 18th, the government changed its mind. This article is left online for archive purposes

Q. Who can sell their annuity?

A. It’s estimated that there are five million people who currently have an annuity and who will be able to sell theirs on the second-hand market from April 2017.

The government says that any annuity that’s in the name of an individual (rather than in the name of a pension scheme) will be able to be sold. This will include joint annuities, which are often bought by married couples, and annuities with a guaranteed annuity rate.

SAVVY TIP: An annuity with a guaranteed annuity rate often pays a much higher income than you’d be able to buy on the open market today. That income can be valuable and should not be given up easily.

Q. Who will I sell my annuity to?

A. You won’t have the automatic right to sell your annuity back to the company you bought it from, although the government has said that the original annuity provider will have the choice to buy back the annuity if they want to (subject to what it calls ‘robust safeguards’). If your annuity provider doesn’t give you this option or you don’t want to sell it to them, you’d have to do is to find someone willing to buy your annuity (who will then get the income that you would have received). You will get a lump sum based on what they’re willing to pay for it.

The government says that all UK-backed companies that buy second-hand annuities and anyone who gives advice about whether someone should sell their annuity, will have to be regulated by the Financial Conduct Authority (FCA), which currently regulates financial services firms such as pension providers and financial advisers.

SAVVY TIP: The government says that these buyers of second hand annuities would be institutional investors (such as large funds) rather than individuals. The government says that it doesn’t believe that buying second-hand annuities would be a suitable investment for individuals.

Q. How much will I get for my annuity?

A. It’s impossible to say at this stage because we don’t know how much of a market there is likely to be in second hand annuities.

You won’t be able to get back what you paid for it or what you paid for it minus the income you’ve already received. You will get back less and it could be a lot less. The government has said that the regulator, the FCA, will develop a calculator that will give people a rough idea of how much their annuity is worth.

 Q. Where can I get advice about my options?

A. The government says that if you want to sell your annuity, you’ll be able to get online, phone or face-to-face guidance from its service Pension Wise. If your annuity is worth more than a certain amount, you’ll have to take independent financial advice.

The regulator, the FCA, will also put warnings in place about the risk of selling your annuity.

Q. Should I sell my annuity?

A. I’d say think very carefully before you sell your annuity. If you have health problems and you are not likely to live for very long, it may be the right thing to do. There may be other circumstances where selling your annuity is a good financial move. However, for most people it won’t be.

Even the government agrees! The government’s announcement includes quotes from the economic secretary to the Treasury, Harriet Baldwin, and the Pensions Minister, Ros Altmann, saying that for most people, “sticking with an annuity is the right thing to do”.

Think about:

  1. How will you get an income? Most people need an income, rather than a lump sum, in retirement. If you sell your annuity, how will you generate an income?
  2. How much will you lose by selling your annuity? You’re likely to lose a chunk of money when you sell your annuity as you’re unlikely to get someone to pay you what it’s worth at the time.
  3. What benefits are you giving up? Annuities provide an income you can rely on without any risk to your lump sum. How many other products promise that?
  4. What will your surviving husband, wife or civil partner live on if you have taken out a joint annuity (in your name) and you die? A joint annuity pays an income to the surviving spouse or partner after the person who bought the annuity has died.

SAVVY TIP: Watch out! We’ve already seen a lot of rogues, fraudsters and criminals exploiting the pension freedoms that have been introduced, and I’m sure we’ll see something similar when people are allowed to sell existing annuities

Q. Will I have to pay tax when I sell my annuity?

A. At the moment, if you sell your annuity income you are taxed at a rate of 55% (or up to 70% in some cases). From April 6th 2017, the government will reduce this tax charge so you are only taxed at your marginal rate. You will then be able to spend or invest the lump sum as you see fit.

SAVVY TIP: Your ‘marginal’ rate means that highest rate of tax you would pay once your pension money is added in. So, if you are a basic rate taxpayer but you get a lump sum from your annuity that takes you over the 40% tax threshold, you would pay tax at 40% on it.

Related articles:

Do you know how much tax you’ll pay if you take money out of your pension?

Will you have to take financial advice to take money out of your pension under pension freedoms?

How will the government’s Pension Wise service work?

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