It is about assigning (which the customer will view as selling) future instalments in return for a lump sum (cash or drawdown transfer) and that needs to be forward-looking.
The price received will not be based on how much was paid at outset but on the buyer’s estimate of the present value of future payments, allowing for how long the annuitant is expected to live.
Customers should first ask if they were without their annuity’s guaranteed income for life, would they have enough to get by? If not, they should think very carefully before considering selling.
Where the annuity will continue to a spouse or other party on the main annuitant’s death, their reliance should also be considered. In any event, any beneficiary must provide their permission before an annuity can be assigned.
Some individuals may be tempted to sell their annuity because they do not expect to live to a particularly old age. Potential buyers will demand health evidence, possibly including medical underwriting.
Those older or in poorer health with a short life expectancy will see that reflected in a lower offer. The first ‘missing piece’ is a centralised facility to underwrite annuitants – having to provide separate evidence to every potential buyer will significantly undermine the attractiveness of shopping around.
Annuitants who assign can take the proceeds in cash, but like the existing pension freedoms, will have this taxed at their highest marginal income tax rate, making this unattractive for larger value annuities. Transferring instead into a flexi-access drawdown avoids any immediate tax charge, with income tax applied to the income only when taken.
If the individual does want to explore assigning further, they need to check if their annuity provider allows assignment.
Possible reasons for not doing so are covered later. They also need to check if the annuity is legally in their name or is actually owned by the trustees of a previous pension scheme where the trustees have undertaken a buyout or derisking exercise.
In the latter case, they first need to ask if the trustees are prepared to adjust arrangements so the member becomes the legal owner – only then can they assign to a third party.
The government will require individuals to take advice if their annuity is worth more than an as yet unspecified amount. This may be framed in terms of the annual annuity instalment.
Those with annuities below that level need to consider whether to proceed without the help of an adviser. The supply of advice is considered later.
Who will want to buy future annuity instalments?
Because of the risks, an individual investor will not be allowed to buy future annuity instalments from another individual. Firms taking part face both conduct and prudential requirements, with special provisions for potential overseas purchasers.
