Fire sale of second hand annuities predicted

21st April 2016


Annuitants will be able to sell on their annuities from April next year, but they could face an increased tax bill and could be pushed into a higher tax bracket for any income they take that tax year.

Those with an annuity over a certain amount will be required to seek advice though the amount is yet to be determined.

Where there is a contingent beneficiary’ such as spouses eligible to receive a widow’s or widower’s pension, then their consent needs to be sought.

All costs will have to be disclosed up front but some say the fact that these costs have to be disclosed upfront and could amount to 10% or more may put people off.

Nevertheless, experts are predicting an initial fire sale of second hand annuities.

Tom McPhail, Hargreaves Lansdown Head of Retirement Policy says: “This is a complex market to create from scratch, however we know that many annuity holders will be interested in trading in their income for a lump sum. The FCA has come up with a good package of measures to try and protect investors, while also giving them the freedom to manage their own money. All fees and transaction costs have to be disclosed up front, however they could easily absorb 10% or more of the value of the annuity, so this may also put a lot of people off.”

“Advice will be mandatory for investors selling an annuity above a threshold value, however the FCA has not yet determined what this value should be. This is perhaps indicative of the wide uncertainty over the size, shape costs and viability of this market. There is still a lot of work to do between now and next April.”

AJ Bell chief executive Andy Bell says: “We expect to see a fire sale initially as customers rush to trade in their existing annuities because they feel they are getting poor value but had no alternative when they purchased them.

“This is backed up by HMRC figures that show a positive impact for the exchequer in the first two years but a negative impact in years three and four.

“However, pension freedoms have given people more options, so it’s far less likely someone will purchase an annuity that they don’t want today. It’s therefore hard to see how a sustainable, long-term secondary annuity market will function, given that we don’t know who the buyers will be or the composition of the sellers.

“Furthermore, we remain concerned that someone who has been ripped off once when buying an annuity could be ripped off again when they sell it.”

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