Pensioners will be able to sell on their annuities from next year, swapping regular income payments for a lump sum. It’s part of government plans to give greater freedom to the 5m pensioners who are already living with annuities.
Some may be regretting their choice, and the idea of a fat lump sum instead of a drip-feed of income may seem appealing.
But there’s so much criticism of the plans it seems virtually no-one thinks they’re a good idea – except the brokers who will trade the annuities.
“I don’t think anyone is going to win, other than the pension companies,” says Ian Lowes of Lowes Financial Management, echoing a sentiment widely felt among pensions experts.
First off: the buyers of the annuities are unlikely to be other pensioners. Those in retirement who have taken the drawdown route still have the option of later buying their own annuity. Those approaching retirement could just buy their own, tailor-made annuity.
“At the moment there’s a whole discussion as to who will buy the annuities. I think it will probably be institutions or pension funds which want that income stream,” says Frazer Wilson from Thomas Miller Investments.
It will create a potentially lucrative market for institutions. But it won’t be so profitable for pensioners.
This will be down to the difficulties in fairly valuing the price of an annuity that’s already been paying out to someone for years, or even decades. There aren’t expected to be a large number of buyers in the new, untested marketplace, which will limit the number of quotes a seller will receive. “It will be difficult to establish a fair price,” says John Gaskell of accountancy body ICAEW.
Read more: Time bomb for pensioners as annuities sink
For sellers, the brute reality is they may get far less than their original pension pot, and less than the annuity would pay if they carry on living. “When people look at the figures there’s likely to be a disappointment. They will think that this doesn’t look like a particularly good deal,” says Wilson.
Brokers which take on the business of valuing annuities and matching buyers with sellers are going to want a fee for doing so. This will eat into the lump sum the seller will receive. “Whenever a commodity is sold, someone has to make money on the way. I’m not convinced anyone is going to come out and do this, and if they do, they will make a profit margin on it,” says Ian Price of St James’s Place.
After this, annuity sellers will be taxed on the lump sum they receive. The government expects to take £1bn in tax over the first two years the market is in operation – not bad for the deficit, not so great for the seller, who will likely be classed as a higher-rate taxpayer because of the size of the lump sum.