Think Carefully Before You Sell An Annuity
A year on from the UK government’s pension regulation revamp, and yet more reform is on the horizon. From next year, annuity holders will be able to sell your existing policy in return for a lump sum or adjustable income – but you should think carefully before you sell an annuity.
What is an annuity?
Annuities are financial products managed by insurance companies that provide an alternative to pensions. They are available for people at retirement who want to swap pensions savings for a regular income. They will pay out an annual income for the rest of your life.
Insurance companies make their money by investing in long-term assets, like government bonds. Interest rates and how long you are expected to live will determine what rates they will offer to you and how much income you will get from your savings.
Annuity purchases can only occur once currently and tend to be for savers who were not eligible for final salary pension schemes. It does not impact your state pension entitlement.
How have pension changes impacted annuity sales?
The pension freedoms announced in 2014’s budgets were welcomed by healthy people with a healthy pension put, and many believed the changes would lead to annuity sales declining.
This is because, prior to pension reform, those people on defined contribution pension schemes (not final salary schemes) were essentially fined if they did not buy an annuity. This is no longer the case, you can decide whether an annuity is the best option for you when you retire. But it’s best to do this with advice.
Despite this change in regulation, recent figures by the Association of British Insurers (ABI) show that annuities continue to grow in popularity. 21,100 were sold in 2015, totalling £1.1 billion in value.
What annuity options are available?
If you are interested in taking out an annuity, be aware that there is more than one option available.
Standard annuities are available to all retirees. Enhanced annuities are available to people with a lower than average life expectancy. These include people with long-term medical conditions, and smokers, who insurance companies do not anticipate you living as longer than healthier people of the same age.
All annuities have different rates, so it is important to do your research – particularly as the government’s measures to move away from compulsory annuity purchases is making the market less competitive.
You do not need to purchase an annuity from the same provider that you saved for your pension with.
Should I sell an annuity?
From April 2017, over five million retirees will be eligible to trade in their annuity income for a cash lump sum, without having to pay the tax restrictions that are currently in place. This is could be an attractive option if you are currently in possession of a low rate annuity, which does not offer a competitive annual payout.
However, if you opt for a lump sum payment, you will need to budget carefully to ensure that your reamaining money lasts for the whole of your retirement.
Are there alternative options to annuities?remaining
Ultimately, your pension pot is your own, and you can decide how best to use it.
Annuities are one choice. Other options include investment, property, or drawing on your pension pot each year. It’s important to think about how long your funds are going to last, so think carefully about making big spending decisions.
Is an annuity the best option for me?
When you need help with your retirement options, we can help you to explore your options and define a plan right for you.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.