Thinking of selling your annuity? Think very carefully

From April 2017, people who have bought an annuity with their pension pot will be able to sell it on, and get a lump sum back. Plenty of pensioners will see this as their opportunity to get rid of something they always thought was terrible value - imposed on them because of a lack of choice. However, before they rush to sell, the experts are warning that they need to be very careful.

Richard Parkin, Head of Retirement at Fidelity International, says he appreciates that some people will welcome this with open arms because they feel they have missed out on the choices that have come in with pension freedoms this year. He adds: "It has the potential to enable customers who have already retired to reshape their retirement plans to better fit their needs."

It will be particularly welcome to those with tiny annuities. Gareth Shaw, head of consumer affairs at Saga Investment Services comments: "Research carried out by Saga found that 58% of people who wanted to sell their annuity were receiving such a small income they could do nothing meaningful with it."

Risks

However, this is not a straightforward decision. Steven Cameron, Regulatory Strategy Director at Aegon says: "With the secondary annuity market, there are huge considerations – it's absolutely not as simple as filling out a form and cashing the cheque."

The experts highlight that giving up a guaranteed income for life in return for cash means taking on additional risk, which people need to understand fully. Andy Cumming, Head of Advice at Close Brothers Asset Management, says: "Longer life expectancies at retirement mean that regular, guaranteed income remain the most secure option for them. Equally, a large proportion of annuities were secured when rates were much higher." Parkin adds: "In essence, this market combines the complexity of defined benefit transfers with the risks of pension freedom."

It may also be expensive. There will be administration costs, fees and the cost of advice. There may also be tax implications. Cameron explains: " If an individual does assign their annuity for a lump sum, the sum will be taxed at their highest marginal rate. You may have a modest annuity of say £3000 per annum, and depending on your other income, may be paying no tax on this. But if you assign it and receive say £50,000 you would pay 40% tax on part of this."

The good news is that the government plans that everyone who wants to cash in an annuity above a minimum level must take advice - with everyone below that level receiving 'guidance'. Cumming says it's essential that this threshold isn't set too high, adding: "Guidance is unlikely to be sufficient, so it is vital that the threshold before financial advice is required does not limit its role purely to higher net worth retirees. Ultimately, individuals must be taking an informed decision when it comes to retirement income, and knee-jerk reactions to new opportunities must be avoided at all costs."