Nearly one in five annuity holders would consider giving up guaranteed income for a lump sum

21st April 2015


Nearly one in five annuity holders would consider cashing in their policy for a lump sum, a new study has found.

In his recent Budget the Chancellor announced plans to consult on allowing UK retirees who have already purchased an annuity to cash-in their policy and a study by investment and financial planning group Tilney Bestinvest has revealed that 17% of existing annuity holder would consider giving up their guaranteed incomes for a one-off cash payout.

Of the remaining respondents, 33% said they ‘would not personally consider selling the annuity I have already purchased for a cash lump sum’, and 50% said they didn’t know.

David Smith, financial planning director at Tilney Bestinvest says: “While this announcement certainly grabbed the headlines and is likely to be popular with some retirees for whom ‘annuities’ has become an almost dirty word as a result of the depressed gilt-yields that have driven annuity rates, the practicalities of implementing the policy are far from straightforward. Indeed, those looking to receive their original annuity investment minus what they have already taken from their annuity will likely be severely disappointed for several reasons.

“It has been announced that insurance companies who currently provide annuities will not be able to enter the market, and therefore the function of selling annuities will be carried out by third party brokers. This cost, coupled with the fees involved in medical underwriting which will be required to carry out the encashment, means that the overall fees for selling an annuity are likely to be substantial. These are on top of the tax which would need to be paid when receiving the cash, payable at your highest tax rate as well as any financial advice taken.”

Smith adds: “As it is more likely that those with smaller annuity pots will be the ones most tempted into selling them due to the low levels of income received, the combination of these costs will have a considerable impact, perhaps even prohibiting the sale.

“Cashing in your guaranteed source of retirement income is a serious financial decision, indeed even Chancellor George Osborne said that for most people, “sticking with that annuity is the right thing to do”. In the majority of cases we would argue that encashment should only be undertaken in the light of professional advice.”

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