I want to sell my annuity for cash - how do I get the best deal? Agony Uncle Steve Webb replies
I have a small annuity which pays £25.45 per month. I have contacted my pension company and they have said I can sell this for a lump sum from April 1917.
Can you offer any advice - how to get the best deal, do I sell on an open market or back to my pension provider? This is new territory to me and I'm sure to many others too.
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On the block: Annuity holders will be able to sell them for cash from next Spring
Steve Webb replies: From April 2017 individuals will be able to sell their annuities for a cash lump sum.
No-one is yet sure how many companies will be interested in buying ‘second-hand’ annuities, and there is no obligation on the company which sold you the annuity to buy it back from you. There are a number of things to be aware of if you are thinking of doing this.
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 those with larger annuities need to be careful not to be tempted by the thought of a cash lump sum and then find they can’t 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.
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The next question is working out what would be 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 there’s 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.
It’s 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 Government’s 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.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money's Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
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