So should you sell your duff annuity?

THE pension freedoms will allow t hose who have already taken an income the chance to sell their annuity back to an insurer company — but should they do that?

In the Budget this year, the Chancellor announced plans for a second-hand annuity market that would allow the 5.5 million people already taking an income from t heir pension t he r i ght to exchange this for cash.

It is just a proposal, but the idea is that from April 2016 this will give the same freedom of choice to everyone with a pension, regardless of what type of deal they have.

But while this could prove to be a lifeline for some, even the Government has admitted it is likely to provide value for money for only a few.

By using the Budget assumptions, industry experts believe that the secondhand annuity service could be used by only 100,000 people.

So, what could you reasonably expect to get f rom selling back your annuity to an insurer?

We asked Alan Higham, the retirement director at investment firm Fidelity Worldwide International, to crunch some figures for us.

He told us that ten years ago, a 65-year-old could have turned a £100,000 pension pot into an income paying £7,000 a year. So far, they would have had £70,000 from their fund.

Now they are 75, they are likely to have another 12 years to live if they are in good health — which means another £84,000 of income. The cost to an insurer to buy this i ncome would be about £91,000. But, of course, this would not be what you would get in your pocket, because the insurer has to pri ce in t heir costs — such as the risk that you would die early and their income would stop, plus other adminis-trative expenses. In all likelihood, what you would probably get is closer to £57,000. But those with poor health could get much l ess. That’s because there is a greater probability of dying sooner and so, therefore, the income to the insurer would stop earlier.

So if someone had life expectancy of just another seven years, they would probably get around £35,000, and if they were critically ill the cash they would receive for selling their annuity would likely be around only £3,000.

‘The payouts on offer to savers are likely to be disappointing, particularly for those who are unhappy with what their annuity pays now,’ says Mr Higham.

‘But if you bought a car and paid too much for it to start with, then selling that car second-hand is not suddenly going to make up your loss.

‘In all likelihood, you’re going to end up even more out of pocket.’

Major insurer Legal & General believes a healthy 75-year- old could receive more than £57,000 — it estimates they could get £78,000. But it points out that to match the income they would have received from an annuity, they would have to earn interest of 8.6 pc a year.

‘Only exceedingly speculative investments can offer that sort of return,’ says Adrian Boulding, from Legal & General.

‘So, it’s not an option that would be recommended to a pensioner i n an attempt to generate a higher income for themselves.’

On top of this, you have taken on the risk that you will live longer than expected — a risk that was previously with your insurer. Insurance companies are still debating the pros and cons of the second- hand annuity market that is likely to come in from April 2016.

And there is a further bonus from hanging on to your annuity if you bought one that pays an income to your spouse after death or had a guarantee to pay out for a particular time if the person who bought it has died.

New rules mean that beneficiaries will get this income tax-free — provided they haven’t already started to receive the money and the policyholder was under 75 at death.

Where the policyholder was over 75, beneficiaries just pay their normal rate of tax.