16th March 2015 at 10:50am
After a weekend full of news about annuities, I thought I’d separate out fact from fiction and summarise what is, and is not, changing for annuities.
Just to re-cap, an annuity is a fixed income that’s guaranteed for the rest of your life, or for a fixed period of time.
Tax-free income for your spouse, civil partner or other beneficiary
Two changes take effect from the start of the new tax year, with positive results for joint life annuities. That’s where your fixed income is paid to someone else after you.
In the past, the income could be paid to your spouse or civil partner, and from 6th April this broadens out. It will be possible to set up a joint life annuity with anyone you choose.
The second improvement is a reduction in tax due in some situations if you’re the beneficiary who receives income from a joint life annuity.
This tax cut will apply from 6th April where your spouse, civil partner (or whoever first received the income) dies before the age of 75 and the fixed income continues to be paid to you.
In this situation, you will get the income free of tax. It only applies where you get the first payment on or after 6th April, so this tax cut does not apply if you’re widowed and already getting the joint life payment before this date.
If your spouse, civil partner (or whoever first received the income) dies on or after the age of 75, the rules are unchanged and you’ll pay income tax on what you receive in the normal way at 0%, 20%, 40% or 45%.
This is a welcome development and brings annuities into line with many other types of pension.
Proposals for 2016 – the ability to sell your annuity
On Sunday, the government announced plans to hold a consultation to review how you might be able to sell your annuity if you’ve already bought one. This means you could end up with a cash lump sum instead of your existing guaranteed income for life, or you could use the money to give you a more flexible income using ‘drawdown’.
At the moment, you’d be hit with a tax bill if you tried to do this and the government plans to remove that tax bill in April 2016. But what’s not yet clear is how the second-hand market would operate, so that someone selling an annuity to get a lump sum can find someone who wants to buy their income payments. Complicated calculations will be involved to figure out the price and there could be a tax cost for you.
If you’re one of the 5 million people who already have an annuity, as H M Treasury says in its announcement, “for most people retaining their annuity will be the right choice.”
But there is an intention to introduce more flexibility, and how that is done will be part of the consultation.
So, there is no change yet, and with the Budget to come on Wednesday 18 March, and indeed a general election in May, it’s likely there will be further developments ahead.
As ever, we’ll cover important announcements here on the MoneyPlus blog, so keep an eye out for more updates.
This blog and any responses to comments are not financial advice. Tax and legislation can change in the future and this blog reflects our understanding of the rules as at 16 March 2015.