Following a recent consultation, the government will lift tax restrictions for people looking to sell their annuity. At present, people wanting to sell face a 55% tax charge, which can be up to 70% in some cases.
Going forward, those selling their annuities will only be taxed at their marginal rate.
Economic secretary to the Treasury, Harriet Baldwin, said on Wednesday: “For most people, sticking with an annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose – the same freedom we gave people approaching retirement in April this year.”
Through changes to the Bank of England and Financial Services Bill 2016, the government will require people accessing larger pots to seek financial advice before they are allowed to sell.
“Extending Pension Wise is a helpful first step, but it won't be enough for many people. Therefore, it's vital that the Financial Advice Market Review and the next consultation on the annuity market works to create stronger links between Pension Wise and the advice industry."
The government’s pension guidance service, Pension Wise, will also be expanded so it can provide free and impartial guidance to those thinking of selling their annuities.
Limited but attractive
Old Mutual Wealth retirement planning manager Adrian Walker said: “The secondary annuity market is likely to be relatively limited and attractive to those currently in receipt of a small regular payment. For those people a lump sum may be viewed as more valuable.”
An OMW survey found that less than a fifth of people would consider selling their annuity; citing concern that they would not receive value for money as a major factor.
“In any event, the safeguards that are put in place to protect anyone hoping to sell their annuity will be vitally important. This market will be one where the potential buyers will be much better informed than the sellers. For the market to operate properly there will need to be effective competition and I will be interested to see where this competition comes from,” Walker said.
“The option to sell your annuity is not a bad one in principle. Some people will welcome the freedom and flexibility to trade in a secure income for a pot of money they can take flexibly in their retirement.
“However, before rushing into a decision, it is important that people remember that the market for second hand annuities is likely to be one in which buyers hold all the information and sellers are in a relatively weak position.
“Nonetheless, a good deal is in the eye of the beholder. For someone with debts or personal circumstances which mean an annuity no longer meets their needs, taking cash could be an attractive option,” he concluded.
Flexi-access drawdown ignored
The Treasury’s paper, however, does not seem to address the need to ensure a competitive market for those people wanting to sell their annuity in return for a more flexible pension income product, according to Andy Bell, chief executive of AJ Bell.