Existing pensioners to be allowed to 'sell' annuities from 2016, UK government announces

George Osborne said that the planned changes would give around five million existing annuity holders "the same freedoms" over how they access their pension savings as those who have not yet reached retirement will be given next month. The changes would be introduced from April 2016 and would be backed by "appropriate guidance and other consumer protection measures", he said.

Pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that although the proposed new freedoms would not benefit all existing annuity holders, some could benefit "so long as [they] understand what they are giving up".

"Those who hold annuities may well find that, as with cars, the sale value of the annuity drops the moment that the pension leaves the forecourt," he said.

"As George Osborne has already pointed out, it will be better for most pensioners to stick with their current annuity: annuity rates are not improving. Moreover, any buyer of an annuity will start from the working assumption that the pensioner may have a good reason to expect that the annuity might not pay out for as long as originally assumed - for example, the pensioner might now be suffering from ill health. The original annuity provider will have made the opposite assumption - that the pensioner expected to be enjoying his or her retirement for many years to come," he said.

"But those whose circumstances have changed significantly may benefit – for instance, someone with a joint life annuity whose partner has died or who has divorced may want to revisit their pension arrangements. And pensioners who have several annuities may want to take a (reduced) tax hit on one or two small annuities in exchange for a cash sum," he said.

An annuity is a policy from an insurance company that converts a pension fund, or part of a pension fund, into a regular pension income. The government is planning to remove the restrictions on buying and selling existing annuities from April 2016, allowing the annuity holder to sell the right to the income that they receive from their annuity without unwinding the original annuity contract. The annuity holder would receive a cash sum, and the provider would continue to make regular annuity payments to the purchaser.

Currently, people wanting to sell on their annuity income to a third party face heavy tax penalties ranging from between 55-70%. If the changes go ahead, they would instead only be taxed at their marginal rate of income tax. They would then be able to take that cash as a lump sum, or to place it into a drawdown product so that they can access the money over time while leaving the balance invested.

As part of a planned consultation exercise, to be published alongside Wednesday's Budget, the government will seek views on the types of buyer that could be allowed to purchase annuities on this "secondary" market. It expects these products to appeal to "a broad range of institutional investors", but does not consider that they will be appropriate for retail investors due to their risks and complexities. Annuity holders will not be permitted to sell their annuities back to the original provider, and providers will not be allowed to purchase and then discontinue their own customers' annuities.

The consultation will also consider what support should be introduced to ensure that those planning to sell an annuity make the right decision. This could include extension of the Pension Wise service, which is being introduced in support of the new pension flexibilities from next month; although changing the scope of Pension Wise would require additional legislation.

George Osborne, the chancellor of the exchequer, said that those who were currently "locked into annuities" that they had already bought "should be trusted with their own pension".

"For most people, sticking with that annuity is the right thing to do," he said. "But there will be some who would welcome being able to draw on that money as they choose - the same freedom we are offering those approaching retirement in April this year. So I am going to change the law to let that happen, and make sure we have the right guidance in place."