Ever since it became permissible, in March 2014, to encash pension funds rather than converting them to income in the form of as annuity, some sections of the consumer press have been arguing that similar rights of encashment should be available to people who have already used their pension pots to buy annuities; and the Chancellor has stated his intention to oblige them.
There are estimated to be some 6 million annuitants, of whom some 300,000 are thought likely to want to take advantage of the new facility, which is due to become available in April 2017. However, the Government has warned that for most people the best decision will be to retain their annuity.
For people who do sell, the cash received will be taxed as income in the same way as the annuity income would itself have been taxed, and as would all but the first 25% of pension fund encashments.
The big difference, however, is that annuity payments and most pension drawdown payments are paid in instalments over an extended period of time, whereas the cash from the sale of the annuity would be paid as a single amount and added to other income for tax purposes. This could result in people paying 40% income tax on their cash.
Consequently, the sale of annuities is predicted to provide additional revenue for the Chancellor. And the insurance companies, who are expected to provide the market for second-hand annuities, will be levying their own charges.
Another factor impacting on the value received by the annuitant is that their health may have deteriorated since buying the annuity, which means that the period for which the annuity payments are likely to be made will have reduced, and with it the sale price.
So altogether, the right to encash annuities is a gift horse which most people should look firmly in the mouth.
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