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Cashing in unwanted annuities

12 March 2015

  • Why allowing people to unlock annuities makes sense
  • Millions forced to buy unwanted annuities would now have an option to cash in if they need to
  • Nobody will be forced to sell their annuity back, but they can if they need or want to

The proposals to allow people to cash-in annuities that they were forced to buy under the old pension rules could prove popular for many of those who have unwanted or low value annuities.  Millions of people previously had no choice and had to buy an annuity with their pension savings, even if they didn’t want to.  The old rules, which have now been swept away meant that anyone without a very large pension fund had no other option apart from annuity purchase if they wanted to access their pension.

Who would benefit?

People who purchased an annuity because they had no choice but need the money now to repay debts or pay for health or care needs or other urgent spending.

People who have other pensions and for whom the annuity is not an important source of their retirement income.

People who purchased small annuities, for whom the small amount of ongoing income will make little difference to their standard of living in retirement.  For example, someone with a £5,000 pension fund who bought an annuity at age 60 might have less than £5 a week for life, whereas having a few thousand pounds straight away could make a real difference to their lives.

What are the risks?

There are risks that people will be offered very poor value and charged unfairly high sums to cash-in their annuity.  Of course, they won’t be forced to sell it, it will be their choice and if there are a few companies bidding for their annuity this may help improve the value offered.

There are risks that people will be enticed into selling back their annuity and later regret it.  This risk is the same as exists under the new pension rules, where people do not have to buy an annuity in the first place.  It is not a reason to deny the opportunity to those who were forced to buy an unwanted annuity in the past.

There are risks that people will cash in their annuity, spend all their money and then have to live on state benefits as they become poor in retirement.  This risk is no different to that which exists under the new pension rules and it just helps remove some of the unfairness between the past and the future.

Many of these people have written to me complaining that they didn’t want or need an annuity and would much rather have a cash lump sum to spend as they wish, rather than an income for life that has no inflation protection.

For those people who have annuitised relatively small sums, the amount of income they receive from their annuity will be very small, especially as annuity rates have plummeted in recent years.  Yet, if they wanted to take their tax-free cash, they had to take an annuity with the remainder.

Many people bought unsuitable annuity products or bought an annuity that does not cover their partner and, especially those with large debts to repay or in need of a lump sum for essential expenses, the opportunity to get money back rather than just taking an income will be a welcome option to consider.

Even if these proposals go ahead, nobody will be forced to sell their annuity, it will be up to them.  But the reason this policy is right is that it would give people an option that they have never had before.   Until the Budget pension changes, people who bought an annuity were stuck for life.  If they had bought an annuity they didn’t need or the wrong type of annuity, it was just hard luck, they were stuck.

I have heard from so many people who are furious that they had to buy their annuity in the past couple of years, whereas if they had been younger the new rules would have meant they could have avoided locking all their pension savings into a product they did not want.

Of course there are risks with such an option being offered.  People would be swapping a guaranteed lifetime income for a pot of money today that they could spend.  They will therefore not have that income in future years.  However, they will not be forced to cash in, it is just an option they would have that they have been denied up till now.  The guaranteed income is not normally inflation linked, so its value will erode over time and if people have other pensions elsewhere, they may feel it is more sensible to have some cash instead.

If someone has become very ill and is unlikely to live long, or needs to pay for care, they might find a lump sum more useful, even if it is much less than their original pension.

Of course, insurance companies would charge to buy back the annuity income, the cash-in value would be less than original pension and would depend on assessments of health and life expectancy.  However, as nobody is forced to sell their annuity, it is just an option for them, this is not a reason to deny them the chance to change their product.  They should be required or encouraged to take independent financial advice to explain the risks of re-selling and help them find a good rate, but if they still believe this is what is best for them, they would then have the chance to undo their unwanted purchase.

Overall, this is an idea worth pursuing and could help so many people who are currently stuck in an annuity that they never wanted to buy.  It is only an option, and unlike the past rules which forced people to lock their pension savings into a potentially unsuitable or poor value product that did not meet their needs, it gives them the chance to choose what they want to do.  As people will be able to do in the new pension regime.

15 comments

1 Gareth Morgan { 03.12.15 at 2:10 pm }

You’re quite right when you say

“People who purchased small annuities, for whom the small amount of ongoing income will make little difference to their standard of living in retirement. For example, someone with a £5,000 pension fund who bought an annuity at age 60 might have less than £5 a week for life, whereas having a few thousand pounds straight away could make a real difference to their lives.”

For most people in this situation, or indeed with less than about £35 a week, things are very clear. If their only income is a state pension then the first thing an annuity does is to reduce their entitlement to Guarantee Pension Credit. That benefit sets a minimum income guarantee at about £35 a week above the current state pension. If someone claiming Pension Credit (remember about a third of those qualifying don’t claim) has an annuity below that level then they won’t see an extra penny of real income because their benefit is reduced pound for pound. It’s not just a few people either, that level of income needs a pot of around the average size.

For people in this situation, the proposal would be a win-win. They would see no drop at all in their income but they would have a capital resource. Below £10,000 the capital would have no effect on the benefit either and if the total held was above that level, then the notional income would reduce the benefit by £1 a week for every £500. For that to reach £35 a week would take capital of £27,500 – and any income generated by that capital would be ignored.

There are some very interesting results from the way that the benefits and tax issues combine and I’ve written a briefing on the effects of annuity selling for individuals which you can download free at http://bit.ly/1DyT16s .

2 dearieme { 03.12.15 at 9:44 pm }

So, Gareth, it’s all to let these people pillage my pockets. Thanks a bunch.

3 xcoalminer { 03.13.15 at 3:51 am }

The basic state pension and pension credit safety net means personal pension savings of around £40,000 was a waste of effort a waste of earlier life enjoyment/opportunity, how wrong is that!

4 Gareth Morgan { 03.13.15 at 11:06 am }

Things will be different with single-tier pensions, at least for those people with full STPs. They’ll float off Pension Credit unless they have extra needs for housing, disability, caring or children.
Pension Credit is not being abolished, although Savings Pension Credit will go for those getting STPs apart from a peculiar 5 year transitional housing element). Those with less than full STPs or with extra needs will be able, along with those on existing SRP, to be topped up by Guarantee Pension Credit so the same situation will exist.
These aren’t new rules; what makes it different is that now there is a choice where, previously, you had to take the annuity and, with it, the hit.

5 sue thomson { 04.06.15 at 6:06 pm }

I am 60yrs old. I currently receive two small annuities. One I receive as £14.00 per month. The other I receive as a lump sum of approx.. £684.00 per year. I am still working on a full time basis. I would like to have these two small pensions now. What do I need to do? Regards

6 Ray Russo { 06.26.15 at 3:34 am }

Hello Ros, I was reading some of the responses people ask you about Annuities etc. I will be turning 65 yrs. in July. I will start receiving annuity Aug 1st in the sum of $88.40 per month for the rest of my life minus federal and state taxes. The other option they offer is 10 Year Certain & Life Annuity $ 81.73 Less Taxes. This would be the “Survivor Amount ” represents the estimated amount that is payable to my Spouse as of the first of the month following my death. WHAT TO DO ?

7 draper { 07.11.15 at 8:39 am }

please can you advice how to cash in a small annuity (15,000) i was forced to buy on retirement 5yrs ago. i would benefit from the cash as my daughter is at university. would a pay 25% tax?

8 Daivd Evans { 10.16.15 at 2:55 pm }

Im stuck in an Annuitie Pension ,has this been passed that you can take all your money out if not is it going to be in the near future ,i took my pension out 2 years ago and had no choice i had a lump sum and there is still nearly 30,000 in the pot ,and all i get is 80 pound a month

9 Sylvia { 11.10.15 at 11:34 am }

Ive a annuity which was to bridge a gap when I was bringing up family .Its worjed out at 195 pounds a year and I pay 20% tax so only recieve 159 pounds a year Ill have to live til im 82 to get my money back .Can I cash it in .Will Ipay 20% tax Feeling robbed.Bit like PPI no yearly increas si becoming worthless Ive been retired since 2011

10 Michael Hill { 11.22.15 at 4:06 pm }

I have a company pension and am now getting state pension. The Prudential annuity that I believe I was mis-sold is a pittance and I will have to be very old before I even get back the money I paid into it. If we are allowed to sell our annuities, I am sure many will because they see them as worthless. It will need some state intervention to make sure that the process is clear and transparent so they are not again cheated by rich companies with few if any morals where money is concerned. And there are so many of them now.

11 Bruce Bonnett { 02.11.16 at 12:03 am }

I am just about to start getting a lifetime annuity of US $122.23 per month for life from my ex-employer — which I chose instead of waiting to take my pension payments at retirement age. I am 49 and live in California, United States. Anyone know where I might try to sell this for cash lump sum now? The few places I contacted so far say they have an annuity minimum requirement $400 or $500 per month before they might consider purchasing the annuity for cash now.

12 ian fletcher { 02.25.16 at 7:47 pm }

Thank you for the information in your comments on the 3rd December 2015. Unfortunately, the link you include does not work (error 404 page).

13 Joe McRae { 11.09.16 at 9:29 pm }

I am a 40 year old survival beneficiary. I receive $147 monthly from Florida Retirement Services for the rest of my life and was looking to sell my payments

14 Deric Botham { 12.18.16 at 6:02 pm }

I receive 29 pounds a month from an annuity with standard life. They tell me there is nothing I can do about this. I get a state pension and a company pension so what can I do?

15 Lawrence Kirby { 02.05.17 at 9:54 pm }

I receive a annuity pension of 91 pounds a month of which I can not leave it to anyone when I die I want to sell it is there any chance as I’m out of work at the moment and would like to get a decent car

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