The Chancellor has announced proposals to enable individuals who have already purchased lifetime annuities with their pension funds to sell these for a lump sum, subject to agreement from their annuity provider (and the secondary annuitant in the case of a joint-life annuity). The lump sum could either be treated as pension income on receipt, and taxed at marginal rates rather than 55%, or could be used to provide a flexi-access drawdown fund, from which taxable income payments can be taken as and when the individual wishes. The intention is that those who have already purchased annuities should no longer be locked in and should be in a position to take advantage of the flexible options that are available to those whose pension funds are still intact from 6 April 2015.
Who will be affected?
Individuals who have already used their pension funds to purchase a lifetime annuity. Only annuities held in the name of the annuity holder and held outside an occupational pension scheme are within the scope of the proposals. Approximately 5 million annuitants are potentially affected.
It is intended that this change will take effect from 6 April 2016. The government is opening a consultation into how the proposals can be made to work, eg what is necessary to establish a second-hand annuity market and what consumer guidance is required. The consultation will run until 18 June 2015 and any changes would not take effect until the next Parliament.
Although the proposal is posited as a means to allow annuitants to access flexible options that were not available to them when they accessed their pensions, it will not necessarily reverse the effects of their earlier decision.
A second-hand annuity is only worth what a buyer is willing to pay for it. This will be influenced by the age and health of the annuitant, as well as the rate of the annuity, but investors may expect a discount. In addition to the risk that the buyer would be taking on, there would be administrative costs to cover. The second-hand value could be significantly less than the net amount that the annuity has actually cost.
The benefit of a lump sum, net of marginal rate tax, will also need to be weighed up against the loss of a regular income stream. As a safeguard, we would expect that individuals with substantial annuities will be required to take regulated investment advice before being allowed to sell them.