Cashing in annuities

macca1974

Hello All

Not sure if this should be in the pensions / annuities forum or discussions, so please move if appropriate.

I've been following the talk and yesterdays announcement in the budget about people being able to sell their annuities for a lump sum and this got me thinking. This is something that various questions have been asked about on MSE which suggests there will clearly be a demand for people who are locked into annuities.

But, my question is, what do people think that they will be able to sell their annuity for?? I was chatting to my Father In Law who has had a small annuity for the last 3-4 years or so, he was suggesting that he might sell it. I asked what he thought it might be worth and his thinking was the amount he paid in, less the income payments that have been made.

Now having worked in and around the financial services industry for many years (including for some companies who sell annuities), I think he was being somewhat optimistic and suggested it would be more like selling a second hand car in that the value will fall massively when selling second hand. Especially once charges, , advice, medicals etc are paid for and if you got 30% of the value you paid (less income received), you would be lucky.

At which point, he said "well whats the bloody point of that then?".

Now, I plucked the number out of the air, but it got me thinking, what would people who have an annuity that they might wish to sell think it is worth and is this realistic?

dunstonh

This is something that various questions have been asked about on MSE which suggests there will clearly be a demand for people who are locked into annuities.

Probably for the wrong reasons though. media coverage and the Govt has incorrectly painted annuity as bad, alternatives good.

But, my question is, what do people think that they will be able to sell their annuity for?? I was chatting to my Father In Law who has had a small annuity for the last 3-4 years or so, he was suggesting that he might sell it. I asked what he thought it might be worth and his thinking was the amount he paid in, less the income payments that have been made.

He has forgotten the benefit of mortality gain. The cross subsidy from those that die early is paid to those that die later. The annuity provider has already taken that into account in setting the annuity rate. That rate may have been affected by health to give a better rate.

A third party firm buying annuities wont offer the same mortality gain (as it already has happened). Although they could a little but not to the same degree. Plus, unlike annuity rates that go up the more health issues you have, a third party is going to want to have healthier people. Not those with reduced life expectancies (or they will offer lower terms).

The third party is going to have to consider cost of regulation and compliance and financial solvency requirements. All the other costs and a profit margin and cover off those that die early, as mentioned.

I suspect the figures will be much lower than the consumer expects and for the vast majority, it will not work out to be a sensible thing to do. Someone aged 75 getting paid £5k a year may be lucky to get £10k IMO. You need to look at the life expectancy and the annual amount paid to get an idea of the value and then factor the other things in that will reduce it.

kidmugsy

Osborne said in his budget speech that he expected that for most people it would be wiser to sit tight. So it's perhaps going to be a niche scheme for people with niche circumstances. Which is not an argument against doing it, of course.

I'm reminded of the number of firms who used to offer insurance against "care" costs: I gather the number dwindled away because there just weren't many customers. And that's in spite of insurance being an obviously wise way of dealing with the prospects of such costs, since the costs of a lengthy spell in "care" are high but the incidence isn't.