Almost one in five annuitants would consider taking advantage of government plans permitting them to sell their right to the income for cash, according to a poll of 1,800 retirees.
While 17% indicated they would sell their contract, 50% said they did not know what their plans were, the Tilney Bestinvest research found. The remainder – 33% – said they would keep their annuity.
The government has published a call for evidence on plans to create a ‘secondary market’ for annuities, after Chancellor George Osborne confirmed at Budget 2015 that existing annuitants would be able to cash in their plans.
The rationale for the move is to give annuity holders access to the same freedoms afforded to people aged over 55 from 6 April this year, which included giving savers unprecedented access to their retirement pots.
The government’s plan to allow annuitants to sell their income rights has been welcomed by some segments of the financial services industry, though concerns have been raised.
With third party brokers likely to conduct any purchases, these include the size of fees a sale could generate, and the impact of annuitants’ health on what they are offered.
MGM Advantage pensions technical director Andrew Tully said following Budget 2015: “This idea is full of pitfalls and is a potential minefield. There are significant risks and two wrongs won’t make a right. Being sold a poor value annuity and then being offered a poor value cash lump sum, which is taxable, will not address the issue of an inappropriate original sale.”
Tilney Bestinvest said encashing an annuity would be a complex decision.
Financial planning director David Smith said: “While this announcement certainly grabbed the headlines… the practicalities of implementing the policy are far from straightforward. Indeed, those looking to receive their original annuity investment minus what they have already taken from their annuity will likely be severely disappointed for several reasons.
“It has been announced that insurance companies who currently provide annuities will not be able to enter the market, and therefore the function of selling annuities will be carried out by third party brokers. This cost, coupled with the fees involved in medical underwriting which will be required to carry out the encashment, means that the overall fees for selling an annuity are likely to be substantial. These are on top of the tax which would need to be paid when receiving the cash, payable at your highest tax rate as well as any financial advice taken.
“As it is more likely that those with smaller annuity pots will be the ones most tempted into selling them due to the low levels of income received, the combination of these costs will have a considerable impact, perhaps even prohibiting the sale.”