Published on 5th June 2015
One issue in the world of personal finance has dominated the headlines for months; the changes to Britain’s pensions industry that will have profound implications for savers and retirees for decades to come.
Much of the focus of the reportage has been on the effects of the changes on savers waiting to retire, but there are equally far reaching changes afoot for those who have already finished their careers and are enjoying their retirement.
In this article, we will explore what already retired pensioners need to know about their rights and entitlements under the new pension laws that come into effect this year.
There are currently five million pensioners living off annuities, insurance products bought with a pension lump sum that guarantee an income for life.
Because many annuities were virtually compulsory on pension policies until 2014, there has been less incentive in the market to provide competitive products that provide value for policy holders.
This means that while some annuities have performed well and are offering pensioners a decent income in retirement, others pay out poorly every month.
Impoverished pensioners have been left feeling frustrated, with large sums invested but weak returns limiting their ability to enjoy the rewards of a life of work.
New rules now allow pensioners who hold annuities to sell disappointing policies, enabling them to regain control over their investments.
Selling your annuity for cash will be possible from the financial year 2016-17.
The chief purchasers are likely to be the pension companies themselves, many of whom have already encouraged Pensions Minister Steve Webb to help develop the market.
However, it will not be possible to simply return an unwanted policy to the company you bought it from for a refund.
The trade in second hand annuities could result in a new derivatives market where bundles of policies are packaged together and sold, which means that insurers will be keen to buy ‘good’ annuities and avoid ‘bad’ ones.
An annuity policy must stop paying out when the original holder dies, therefore insurers will be wary not to buy back policies from holders in poor health.
This will have implications for policy holders, who will possibly be required to pass a medical examination in order to get the best price for their policy.
At the moment, selling your annuity attracts such massive tax penalties that there is no point in doing so.
The minimum tax levied on an annuity sale is 55 percent, with some policies attracting rates of up to seventy percent.
The lump sum that you receive will be taxed at standard income tax rates, so if you have no other income and your lump sum falls within the basic income tax band (say £30,000), you will be taxed at 20 percent. This means a tax bill of £6,000.
This is of course, far better than a tax penalty of over 55 percent, but by no means ideal.
The Chancellor has suggested that for many pensioners with good policies, the best strategy is to hang on to them. The new market for annuities does not exist yet and will take at least a year to evolve, which gives annuity policy holders time to get advice.