Pension Freedoms & Annuities
The Government has extended its pension freedoms to around 5 million people who have already bought an annuity.
From April 2016, the government has removed the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract.
Pensioners now have the freedom to use that capital as they want – just as those who reach retirement with a pension pot can do under the pension freedoms announced in Budget 2014. They can either take it as a lump sum, or place it into drawdown to use the proceeds more gradually.
At the time of making the changes, Chancellor of the Exchequer, George Osborne, said:
“There are 5 million pensioners who are locked into annuities they have already bought. 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.”
What is an Annuity?
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered.
The main types of annuities are:
Single Life Annuities
A standard annuity in which you receive all the income.
Joint Life Annuities
Similar to a single life annuity, except a percentage of your income will continue to go to your partner after you die.
Your retirement income will increase each year in line with the rate of inflation to maintain your buying power.
You can choose to keep a percentage of your money invested, meaning that your retirement income will fluctuate depending on the performance of your investment.
To reduce the amount of risk, some products will guarantee that your income will not fall below a certain level.
What changes can we expect?
FromApril 2016, this new flexibility was introduced for people currently receiving income from annuities they have purchased. Approximately 5 million people are potentially eligible to benefit from this choice. These changes allow the annuity-holder to access the value of their annuity where they can find a willing third party buyer.
For the great majority of customers, selling an annuity will not be the right decision. However individuals may want to sell an annuity for instance to provide a lump sum for relatives or dependents; pay off debts; in response to a change in circumstances for example getting divorced or remarried; or to purchase a more flexible pension income product instead.
How will the process work?
When an individual has found a willing buyer, their annuity company will continue to make payments during the customer’s lifetime but once a sale has been agreed it will “reassign those payments to the purchaser”. So the purchaser will give the annuity seller a cash lump sum in return for the income from the annuity company.
However, people wanting to sell their annuities will not have the right to simply sell it back to their original provider. And the government said it “is not minded to allow the original annuity provider to purchase, and then discontinue, their own customers’ annuities”.
Britain’s pension system is undergoing a seismic change. Following changes introduced in April 2015 you now have more choice and flexibility than ever before over how and when you can take money from your pension pot. From April 2016, we have been able to see how this legislation impacts on annuities and how you can elect to take this as a lump sum. Take your time to understand your options, and get help and expert advice as what you decide now will affect your retirement income for the rest of your life.