View the article online at http://citywire.co.uk/money/article/a868736
Why selling your annuity could cost you £10,000
Retirees who want to cash in their pension will face large fees for advice, administration and health checks.
Retirees planning to trade in their annuity for a cash sum should be aware the process could cost them thousands of pounds in fees and tax
From April 2017, those with an annuity will be able to sell the guaranteed income stream for a cash lump sum as part of the extension of pension freedoms to those who have already retired and purchased, what used to be, a non-refundable annuity.
While the idea of a straight swap for the annuity sounds like a great idea, retirees expecting to receive their original pension pot less the income payments they have already received, will be in for a shock.
The process won’t be that simple and it won’t be that cheap. In fact, it could cost as much as £10,000 in administration and advice fees and retirees, according to Andrew Tully, a retirement expert at insurer Retirement Advantage.
Those wishing to sell their annuity should also be prepared to go through health screening as insurers will offer less for an income stream from an unhealthy person who is likely to die sooner as the annuity income stops when the individual dies.
Tully set out two case studies that give an idea of just how much money a retiree will get for their annuity.
Case study 1
Sheila bought her annuity in 2013 aged 61. Due to high cholesterol and high blood pressure, Sheila had a life expectancy of just 18 years when she purchased it.
Due to her ill health Sheila was able to purchase an ‘enhanced annuity’ which pays out a better rate of income to those who have shorter life expectancy. In Sheila’s case the annuity rate on her pension pot of £60,000 was 6%, meaning she received £3,600 a year.
Since she purchased the annuity, Sheila’s health has deteriorated and her life expectancy is now 14 years.
According to Tully’s calculations, Sheila has £50,400 left of her pension based on 14 years of annual pay-outs of £3,600.
However, Sheila won’t receive that much as Tully said the cost of administration, health checks and advice, which will be mandatory for annuities worth over an as yet undecided amount, will cost £10,000.
This leaves £40,400 but Sheila won’t receive this amount either. She will have to pay income tax on the cash lump sum she receives which totals £9,563, leaving her with £30,837.
Case stud>y 2
John bought his annuity in 2014 aged 65. He has an average life expectancy of 21 years and didn’t look into buying an enhanced annuity. Instead he bought his annuity straight from the pension company without shopping around and received a 5% annuity rate on his pension pot worth £100,000, meaning he receives £5,000 a year in income.
Now John realises that he may have been able to get a better deal by shopping around and is wondering if the best solution is to just get his money back.
With 20 years of £5,000 a year pay-outs left, John’s ‘notional income remaining’ is £100,000, even though he’s had a year’s worth of income already.
Minus the £10,000 Tullly believes he will pay in costs, John is left with £90,000. Like Sheila, he will have to pay income tax on the lump sum, which will cost John £27,803.
This means he will receive £62,197, losing him 38% of the £100,000 he could receive as income.
Tully said those who are concerned that they were sold a poor value annuity when they retired ‘won’t necessarily get better value’ if they trade it in as it locks in poor value.
‘People are presenting [annuity sales] as a solution to poor value annuities sales but it won’t be,’ he said. ‘If anything it will exacerbate the poor value.’
News sponsored by:
Here at BlackRock, we help investors make more out of commodities with a range of innovative, flexible and resilient investment strategies.
From Brazil and Mexico, to Vietnam and Nigeria, the rapidly developing economies of Latin American and frontier markets, which are some of the smaller, less developed economies in the world, provides investors with a wealth of potential opportunities. Discover why BlackRock's investment trust range is well placed to help you make more of these exciting regions.
In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.
More about this:
More from us
- Beware frauds and bad deals when selling your annuity
- The pensioners sidelined by new annuity freedoms
- Cash, annuity or drawdown: which is best for you?
- Pensions: how to avoid running out of money
- Insurers face scrutiny over annuity mis-selling
Tools from Citywire Money
From the Forums
Weekly email from The Lolly
Get simple, easy ways to make more from your money. Just enter your email address below
An error occured while subscribing your email. Please try again later.
Thank you for registering for your weekly newsletter from The Lolly.
Keep an eye out for us in your inbox, and please add email@example.com to your safe senders list so we don't get junked.