Can you sell your pension annuity for cash?

Elderly man smiling as he may be able to be able to exchange your annuity

Pensions

MoneyPlus Features Team

16th December 2015 at 11:33am

More than five million people who have an annuity may be able to choose whether they want to swap their guaranteed income for a cash lump sum from April 2017, the Government confirmed on 15 December.

It’s the next step in the Government’s plan to ensure everyone can benefit from the pension freedoms which began in April 2015.

How will it work?

The Government is removing tax barriers and creating a secondary annuities market where you can sell your annuity on to a company, including your existing provider if you wish, choosing the best price you can get.

Currently, selling or surrendering an annuity can be difficult – and may not be possible – and is very likely to incur a very hefty tax bill.

How much would you get back – and what about tax?

How much you’d get for your annuity would depend on a range of things including your annuity payments, health, age, buyer costs and what the market is willing to pay – all of which could make selling your annuity a lot less attractive.

The money you’d get would be treated as income and taxed at your ‘marginal’ income tax rate.

While some details are still to be fleshed out, the Government intends to work with industry regulators to create an online tool to let annuity holders get an estimate of how much theirs is actually worth.

Why would you want to do this?

You might want to provide a lump sum for relatives or dependants, meet a particular financial need or goal, such as paying off debt, respond to changes in your circumstances or a more flexible pension income.

And a further reason to consider doing this is to pass on more of your savings at death as annuities often have much more limited or, sometimes, no death benefits. But do remember, if you cash in your annuity, this money is inside your estate for inheritance tax purposes.

As the Government says, for “the vast majority of people, continuing with their existing annuity will be the right choice”.

Is it right for you?

Selling an annuity won’t be right for everyone and there are lots of things to consider.

Ken McGaughey, Head of Customer Annuity Solutions at Standard Life, says: “There could be solid reasons for taking this option, but it will depend on the value offered and individual circumstances. The value of the lump sum and the flexibility it brings needs to be weighed carefully against the security of the annuity being given up.”

 

If you did take this course of action you wouldn’t be able to rely on a regular fixed income and some annuities come with particular guarantees, so you’d need to check what you might be giving up.

Decisions, decisions

Those wanting to sell an annuity above a certain amount will have to take financial advice of some kind but it’s not yet known what this amount will be. Adds Ken McGaughey: “I’d always recommend advice is taken before making a decision like this.”

We’ll update this as more details become available.

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The information in this blog or any response to comments should not be regarded as financial advice and is based on our understanding in December 2015.