One in four hope to cash in annuityBut Which? survey shows payouts likely to disappoint

25 April 2015

hand fist grabbing £10 notes

One in four retirees are looking to take advantage of a scheme to sell their annuity for cash, according to a Which? Money survey. 

However, our research revealed that most are expecting to get payouts for their annuities far higher than is likely.

When Which? Money surveyed 542 members with an annuity, more than a quarter (26%) said they want to sell their annuity in exchange for cash. Two thirds (65%) of these potential sellers said that they’d want at least 90% of their original pot back (minus any previous payments made to them).

Almost half (45%) would want their entire remaining fund back if they were to sell up. Some 70% of annuity owners said they wanted to get rid of their annuity because they were forced to buy one.

Find out more: Annuities explained - how these products work 

Annuity payments 

In the 2015 Budget, the government said it wanted to give existing retirees with an annuity the chance to enjoy the same pension freedoms as those yet to retire. It would do this by allowing individuals to sell their guaranteed income for either a single lump sum or a series of payments.

However, the government has said that it doesn’t want insurers to buy back the annuities they’ve sold to customers, as it is concerned sellers will fail to shop around for a better deal. 

Instead, it’s consulting on the creation of a secondary market, where third parties could buy an annuity and receive the income from it for the rest of the seller's life, paying a lump sum to the person selling the annuity in return.

However, research from the pensions industry suggests the deals eventually offered to people cashing in an annuity are unlikely to tempt would-be sellers. Pensions provider Fidelity suggests that if companies were to buy second-hand annuities the costs of the sale would eat up about 40% of whatever initial payout the annuity holder received. 

If the seller was in poor health the payouts could be even lower because the company buying the annuity would receive income for a shorter period.

Find out more: Income options for your pension under the 2015 rules - learn which option is best for you 

Cashing in your annuity

It is possible, in some circumstances, to cash in your annuity at present, but you’ll currently face tax charges of between 55% and 70%. 

The new prospective scheme would see this charge removed, so people are taxed only at their normal income tax rate.

Which? is campaigning to ensure that the pension reforms benefit everybody – both new retirees and existing ones – and that consumers are protected from poor practice. 

Find out more: Better Pensions campaign - sign our petition to show your support

Annuity market hits all-time low

The Which? survey results come at a time when annuity rates are at an all-time low, according to new research from financial website Moneyfacts.

Moneyfacts' data, released earlier this week, suggests that the average income on offer from a standard annuity for a 65-year-old with a £10,000 pension pot has plunged by 5.9% since the start of the year. 

Annuity rates for someone with a £50,000 pot fell even more sharply, by 6.4%, the research suggested.  

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