A warm welcome to the ever growing number of customers who are receiving our newsletters regarding the Governments announcement that it wishes to introduce a traded annuity market in the UK.
For new readers it is important that we make you aware that these are not regular monthly newsletters as sometimes there is just nothing new to say, however our aim is to make you aware of major announcements or action.
In this newsletter, we look at what the market may offer you in April 2017 which now looks like the earliest possible start date.
We have previously discussed with customers that we felt that their existing annuity / pension provider may want to buy back the annuity in exchange for a cash lump sum. We felt that many providers may want to try free themselves from an annuity they sold to a customer which the regulators current annuity sales review may highlight as a poor sale. However the Government has said that “the government is not minded to allow the original annuity provider to purchase, and then discontinue, their own customers’ annuities”. Perhaps they are worried that one poor customer outcome could lead to another.
This means that if you do want to sell your annuity you are going to have to put it up for auction and sell it to the highest bidder. Only financial institutions will be able to buy your annuity. The older or less healthy someone is, the less they will receive for their -annuity as the buyer will only receive the income until the seller’s death.
So what can you expect to receive?
It is important to start this section by making you aware that these are some assumptions being made by various financial institutions. Nothing is yet guaranteed and there is still plenty of time for things to change.
Fidelity Worldwide Investment think that a £100,000 pension pot used 10 years ago by a then 65-year-old to buy a £7,000-a-year annuity would receive about £48,000 if there were able to sell it today. Now aged 75-year-old they would be giving up their £7,000 a year income for £48,000, just short of 6 years income, although the lump sum would be liable to income tax.
Some industry experts are more optimistic, particularly for those who have not held their annuity for long. Hymans Robertson, fee that holders of annuities who bought five years ago could get back as much as they put in, despite the fact that they have been drawing an income throughout those five years. They estimates that someone who used their £50,000 pension fund to take out an annuity five years ago when they were 65 would have been given an income of £3,600 a year, so would have received £18,000 in payments so far. It then calculates that the now 70-year-old would be able to sell it for £58,900 – i.e., giving them £8,900 more than they had five years earlier, despite taking the income over that time. We are less certain about this forecast but we would love to be proved wrong.
As previously stated income tax is very likely to be payable on any lump sum you receive. Even people on very modest incomes could find that the lump sum they received pushes them into 40% or even 45% tax if the lump sum you receive plus any other income you earn when added together is worth £150,000 or more.
As always we finish this email by reminding you that a regular income in retirement is a very important and valuable asset. A lump sum (particually after tax) may not in your best financial interests.
If there are any subjects you would like covered in future newsletter please feel free to let us know.
To register your interest in Cashing in your pension annuity please visit our website www.cash-in-my-annuity.co.uk