PLANS ABANDONED TO ALLOW YOU TO SELL YOUR RETIREMENT ANNUITY
The March 2015 Budget introduced an interesting consultation designed to allow you to sell your pension annuity and convert this to a lump sum. These proposals have now been abandoned, so it will now not be possible to sell your retirement annuity, except in very restricted circumstances.
These changes will be attractive to you if you need access to cash from your pension rather than to receive a guaranteed income for life.
Now, the only way you can sell your retirement annuity is if your total plan is worth less than £10,000, and your product provider allows you to sell your annuity. Not all providers permit you to do this, and only if they deem your contract to be too small for them to make a profit on it.
Otherwise, the only other type of annuity that can convert to cash is a fixed term annuity, or a temporary annuity. These are specialist annuity contracts that allow you to run a fixed income for a certain term, and then convert to cash after that term completes. You should be aware oif your annuity is one of these, and you are likely to have taken advice since these are more complex products.
- Consultation to allow you to sell your pension annuity
- Proposals not yet law
- Convert your pension annuity to a cash lump sum
- Issues to consider when selling your retirement annuity
The problem with your pension annuity – the current rules
If you converted your pensions to an income before April 2015, you probably bought a pension annuity. A pension annuity converts your pension plan to a guaranteed income for life. For most people, this guaranteed income is a valuable way to provide money for your retirement.
If you could, would you swap your retirement income for a cash lump sum?
Pension annuities – the problem
Many people feel that a pension annuity is poor value for money. You might want to access that fund, but once you buy a pension annuity you usually cannot change it, and you certainly cannot get access to the fund once you have bought the income (without paying a massive tax charge for an unauthorised transaction).
If your circumstances later change, you cannot reverse your original decision.
From April 2015, all pensions that do not provide final salary benefits can be used to buy a flexible pension or flexible drawdown. This gives you complete flexibility to access your entire pension fund, after tax, once you reach age 55. See our article on flexible pensions for more details.
This is great news if you have not yet bought a pension annuity. If you have, you are currently locked in to this product.
How to sell your pension annuity
The Government announced in the March 2015 Budget that a consultation will be launched to permit you to sell your pension annuity to a 3rd party in exchange for a cash lump sum. This might be good news for you if your circumstances have changed and you need access to a cash lump sum rather than an income.
How will selling your pension annuity work?
You will sell your future income to a 3rd party – probably an investor or insurance company. They would continue to receive the income you were entitled to receive from the pension annuity. Instead the 3rd party company will pay you a cash lump sum. The current 55% tax charge on such transactions would be removed.
Possible issues to consider when selling your pension annuity
Your income will stop
If you sell the pension annuity, the future income will stop. You need to be sure that your other income sources will be enough, or that you could provide enough income from the cash lump sum you release.
The lump sum will be based on your life expectancy
The 3rd party company will likely make an assessment of your future life expectancy. They may require you to go through a medical examination. Most pension annuity incomes will cease on your death, so the 3rd party company will need to assess how long they think you will live, and the lump sum they pay you will vary according to this assessment. If you are relatively young and healthy expect a larger payment. If you are older or have underlying health conditions, expect a smaller payment.
Your annual allowance will reduce
If you sell your pension annuity your annual allowance will reduce from £40,000 to £10,000. The annual allowance is the maximum you are permitted to save into a pension in a financial year, under most circumstances. If you plan to sell your pension annuity you should be certain that you do not want to make future pension contributions over the £10,000 limit in future years. Bear this in mind if you are still working and your employer pays into your pension plan.
Selling your pension annuity is a complex transaction
This is an area where we would recommend you seek professional financial advice. There are many complicating factors, and the decision is not a simple one.
What to do next
Take a look at our article on retirement income.
We also offer a free retirement checklist designed to help you think about the options in retirement. Just fill out the form below.
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About Dan Woodruff
Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.