It's been confirmed that one of the key measures of this year's Budget will be a change in the law to allow pensioners to sell their annuities. The question is, will you take advantage of it?
In his speech on Wednesday, George Osborne will further relax the pension rules to give pensioners who are already locked into annuity contracts the chance to "sell" the income they receive. In return, they'll get a cash lump sum or will be able to place the funds into drawdown, allowing them to access their pension savings more flexibility.
This, says Osborne, will give those who have already retired the same freedoms as those yet to do so, instead of obliging them to remain in annuity contracts that could be unsuitable. "There are 5 million pensioners who are locked into annuities they have already bought," said the Chancellor, "[and] they should have the same freedoms as we have given everyone else.
"For most people, sticking with that annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose – the same freedom we are offering those approaching retirement in April this year. So I am going to change the law to let that happen, and make sure we have the right guidance in place. People who've worked hard and saved hard all their lives should be trusted with their own pension."
To help make this process viable, the Government will remove the prohibitive tax charge currently in place for those wanting to sell their annuity. As it stands, retirees wanting to go down this route will face a charge of 55% - and in some cases up to 70% - but following the rule change, people will simply be taxed at their marginal rate.
It's widely expected that the majority of annuitants will want to stick with their contract for the guaranteed income that it provides. However, others will relish the chance for a bit more freedom – some may want a lump sum to pay off debts or help their children get onto the property ladder, while others will want to stay in control of their finances by opting for income drawdown, and then there'll be those who simply want the chance to escape from a poor value annuity.
The option that's right for you will ultimately depend on your individual circumstances, and will rely heavily on seeking suitable advice. Of course, the proposals aren't finalised yet, either – a consultation on how this 'secondary annuity market' could work will be launched on Wednesday – so it could be some time before the final measures are introduced, and there are also fears that the selling of annuities could still result in poor value.
Richard Eagling, head of pensions at Moneyfacts, commented on the announcement: "It seems that the Government is serious in its desire to explore the possibility of introducing annuity recycling, a change that could come into effect as early as next year if its consultation goes well.
"However, it is still very early days for the concept and there are numerous questions that need to be answered satisfactorily, in particular, how will existing annuities be valued fairly when they are sold? There is a real nervousness that introducing a second-hand annuity market could see those already receiving low annuity rates hit a second time and forfeit even more of their retirement income when they sell their existing plan."
This reiterates the importance of seeking suitable advice, both for those who may want to consider selling their annuity, and also for those who haven't yet decided how they'll secure a retirement income. Annuities could still be the right choice for many, so it's worth considering all the options carefully. Read our guide to make sure you understand the risks involved, consult Pension Wise for additional guidance, and if you're ready for more tailored options, consult our no obligation annuity planner.
Knowing the best way to secure a retirement income will never be an easy answer, but with the right guidance, you could be closer to making the right decision.
Money Matters: 16th Mar 2015 09:19:00
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