New pension freedoms may not offer value

Pensions changes may not hold great value
Pensions changes may not hold great value

The government has stated from 2017 pensioners will be able to sell existing annuities they are already receiving. This would have the effect of extending pension freedoms to those who have already bought a guaranteed income for life.

Perhaps this initiative is aimed primarily at people who bought annuities in the low interest rate years just before pension freedoms arrived in 2015. This is because during these times people were receiving historically low returns for annuities, but generally had to take the plunge and make the definitive decision of buying an annuity.

So it is perhaps not too surprising to hear pension freedoms are to be extended to allow people to sell or trade them in for a lump sum, due to the inflexibility and poor value the old system offered. However, this new initiative will need much thought as, for example, if you sell your annuity the buyer, unlike purchasing a conventional plan, will not receive an income for the rest of their life but for the rest of your life.

As a result of this buyers will not only be checking out the returns of the annuity with regards to benefits such as spouse benefit after the first death, but also the health of the seller. I believe best prices for annuities sales could be received by people who originally purchased an impaired annuity for themselves due to having low life expectancy. Therefore they received a high annual return on their pension pot which could be twice the amount a healthy person receives. However, if due to medical advances or lifestyle changes their life expectancy has improved, they could reasonably expect to get a good price for their annuity. Although this does beg the question that if you are now in reasonable health and getting twice the annuity rate a person of your age, then why would you consider selling it?

I believe although the annuity market will soon be freed up most sellers will struggle to get good value by selling their annuity as things stand. But if someone need a cash injection and perhaps have only a small annuity paying a few pounds a week I can see the attraction of selling.

Also it must be remembered that although the government have given the green light for the market to commence in 2017 it hasn’t given the details of how the market will function. It is possible they may decide to grant some tax relief on the lump sum pay outs making the market more attractive than it looks at first glance.