Trustnet Magazine Issue 15 February 2016 | Page 10

MONEY

Anyone who didn’t buy their
annuity themselves should check
with their annuity provider.

SUIT YOU, SIR?

Annuities are useful products,
but are priced according to the
UK government bonds (gilts)
market. As a result, the low
interest rate environment has
made them appear poor value,
but is selling them the right thing
to do?
If you have a small annuity that
is delivering a monthly income
of just £50 a month, swapping
it for a cash amount might be a
sensible decision, says retirement
specialist Billy Burrows of
William Burrows Annuities.
At the other end of the market,
if you bought an annuity some
years ago and have other income
such as a final salary pension, you
might consider taking a lump
sum, putting it in a drawdown
product and passing it to your
children as part of your estate.
For them, taking advice
will be easy as they will have
alternatives, but those in the
middle face a tough decision.
“For those with an annuity
paying £5,000 or £6,000 a year,
it represents an important part
of their retirement income,” said
Burrows. “These are the ones who
will get really poor value in the
secondary market.”
This is because while the
secondary market is a good idea
in theory, in practice there are a
number of issues to overcome.

NO SURRENDER

It may appear that all you have to
do is find a buyer for the annuity,
but the first obstacle is getting
the insurer that issued the policy
to consent to reassigning the
income to a third party.
8

ANNUITIES
XXXXXXX

IF YOU HAVE A SMALL
ANNUITY THAT IS
DELIVERING A MONTHLY
INCOME OF JUST £50 A
MONTH, SWAPPING IT
FOR A CASH AMOUNT
MIGHT BE A SENSIBLE
DECISION

Some providers may be champing
at the bit to buy back policies –
especially, for example, those that
offered enhanced or impaired
annuities in better financial
markets, and who may now be
aiming to limit their liabilities.
Many older style products still
in existence offer guaranteed
annuity rates (GARs), which

are expensive for insurance
companies to honour. These are
likely to be early targets.
In the end, insurers may be
compelled to agree a sale, possibly
through a clearing house with
insurers making blind bids for
policies. This should eliminate
the problem of consumers being
offered paltry sums, particularly
for policies containing valuable
clauses, such as GARs.
Alan Higham, founder of
consumer website Pensions
Champ, suggests that anyone
with GARs may receive some
attractive offers to give up their
benefits.
“Even if the seller lost 40
per cent of the value of the
annuity from when it was
taken out, because rates were
so much higher, it could still
prove beneficial, releasing a
considerable amount of money.”

DEEPER AND DOWN

However, Higham has concerns
about how values will be
communicated, because consumers
must get their heads around one
thing in particular when it comes
to the price – the discount.
Experts say conservative
estimates will place discounts at
20 to 30 per cent, but accept they
could be 40 per cent or more.
The government may determine
minimum rates for guaranteed
elements such as GARs, but
otherwise rates will be determined
by the insurers. These prices will be
based upon the current gilt market,
not the price of the product when it
was sold.
“If that discount is 40 per cent,
will consumers be told that in stark
terms and will they understand it?”
Higham asked. “In that situation,
it might be a better bet to borrow
money and repay it out of their
guaranteed income.”

HEALTHY PROFITS

TYPES OF ANNUITY
TYPE

HOW IT WORKS

Single life

Paid just to you, either for life or for a
fixed number of years.

Joint life

Payments continue to your spouse
or partner after you YK