Plans to help retired pensioners escape the clutches of low rate annuities have been outlined by the government.
From April 2017, investors can cash in their annuity on a secondhand market.
The move will let the pensioner take the annuity as a cash lump sum, buy an alternative annuity or to out the money into an income drawdown plan.
Annuities are insurance contracts that guarantee a retirement income for life.
Sales have plunged in recent years due to poor performance and the start of flexible access rules last year.
The contract locks the buyer into the annuity for life, but the government plans to work around the problem by keeping the contract in place, providing the pensioner can find a buyer to take over their side of the bargain.
Tax trap for some pensioners
“This would work by the annuity continuing to pay out as agreed, only reassigning the payments to the buyer,” said a Treasury spokesman.
“The new rules will cover all annuities held by individuals, whether they were bought in the past or new contracts made after April next year.
“Guaranteed rates and joint annuities are also included in the scheme.”
However, swapping or cashing in annuities will come with an expensive sting in the tail for some investors.
If the money they receive for the annuity pushes them into a higher tax bracket, they will have to pay income tax at that rate.
More choices for annuity buyers
HM Revenue and Customs (HMRC) estimates out of 5 million annuity holders, around 300,000 will want to cash in their contracts.
This is forecast to raise around £960 million in extra income tax for government coffers in the first two years of the scheme and around £650 million a year after that.
That works out at an average tax bill of £3,200 for pensions cashing in their annuity.
“Trading in an annuity will help tens of thousands of pensioners locked into contracts paying an amount of money that makes no difference to their standard of living,” said the spokesman.
“These people had to take an annuity because the rules said they had to even though they had very small pension funds. These are now abolished and people can spend their retirement savings how they want.”
