annuity-definition-500x500THE CHANCELLOR CONFIRMED his plan to extend pension freedom to about 5 million people who have already bought an annuity. A consultation published on the day of the Budget on how a secondary annuities market could work suggests mirroring the £30,000 mandatory advice threshold for defined benefit pension transfers.

If you already have an annuity – an insurance product which gives a guaranteed annual income until death – you could be allowed to trade it in for a lump sum without a tax penalty from April 2016. Those who do sell will potentially receive a lump sum, or may put the money into an income drawdown product – which allows them to withdraw amounts as they need them – so they can access the funds more gradually.

Currently, those who want to sell their annuity to a willing buyer have to pay tax of at least 55% of the value of the annuity – and in some cases, the amount is up to 70%. This charge will be removed, so those who sell are taxed only at their ‘marginal’ (normal) income tax rate.

Under the proposals, individuals would be required to obtain a minimum number of quotes before transacting, and the proposal is not to ‘unwind’ existing contractual agreements with annuity providers, but for the annuity holder to sell on the product to a third party – probably an institutional investor (companies investing for the future), for an agreed lump sum. The annuity provider would then continue to pay the annuity payments to the third-party investor for the lifetime of the original purchaser.

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