The benefits of the second-hand annuity market

Therefore, old clothes are not second-hand but ‘vintage’ and beat up furniture which has seen better days is suddenly requisitioned, touched up and becomes ‘shabby chic’. At this point I am reminded of that Harry Enfield character who effectively sells junk for huge prices to people with more money than sense.

However, in financial services and the annuity market in particular, second-hand is not seen as a term to be jettisoned just yet; indeed, the recent announcement by the Government which will allow individuals to sell off their unwanted annuities for cash from April 2017, has delivered a real boost to the ‘second-hand annuity market’. Perhaps HMT has missed a trick here and there might have been a marketing benefit in changing the name to the ‘vintage annuity market’.

However, the removal of the 55%-70% tax charge from April 2017 should give the market an impetus regardless of the name. Indeed, taxing those selling at their usual income tax rate will make the option much more attractive to those who want to get rid of a policy which may not be delivering the income they want, or they had initially expected when they took it out.

So, what does this actually mean in practice? Well, alongside the pension freedoms announced last year, it means there are now more valuable options available for those in retirement holding such annuities. This latest one being the option to sell it on the second-hand market.

This is especially pertinent for individuals with older pension policies that started in the 1980s or earlier – they, and/or their advisers, should be firstly checking what guarantees their policies contain, because obviously from April 2017 these options open up, and they could see their policies increase significantly in value.

Many pension policies that commenced before the 1980s, for example, contain guaranteed annuity options. These options usually have to be used at a fixed age - 65 for men, and 60 for women – and if they’re not used the guarantee could be lost although some policies may contain a range of options.

Under the new proposals it will be possible to buy an annuity with a guarantee and then sell it. For example, a £10k policy at age 65 will give an income of around £550 per annum. An annuity bought with the guarantee may give £1k per annum. If that annuity was sold as soon as it was purchased it may be worth over £13.5k to a healthy individual. This increase in value could give a welcome boost to an individual’s retirement savings and introduce new flexibility to retirement planning particularly for women where the option could be available from age 60, a number of years before they are able to access their State pension.

Individuals should therefore be firstly checking with their providers to see what guarantees their policies contain and when they are available. Then, given the potential complexity of the arrangements and the overall need to ensure the option works within their entire retirement wants and needs, they should be visiting a later life specialist adviser in order to discuss the range of options available to them.

Certainly, this new change represents an opportunity for later life advisers to market their services to individuals who could be potentially affected by the opening up of this sector. Again, the Government is delivering greater choice, which requires greater responsibility on the individual’s part; it is therefore absolutely vital that such people take advice in order to make sure they do what is best for them and that they do not encounter any unforeseen negative circumstances by making a poor decision.