HM Revenue & Customs (HMRC) expects 300,000 people to take advantage of new legislation which will allow them to sell annuities.
The second hand annuity market is set open in April 2017. People with existing annuity contracts will be allowed to sell their products for a cash lump-sum.
In a paper released today, HMRC said it expects 300,000 people to take up this option, out of five million annuity holders.
The tax authority said it would tax people at their existing income tax level. This means that someone who currently pay 20% tax could be pushed into a higher rate band if they sold their annuity for a large amount.
‘Some of these individuals will choose to receive a taxable lump sum and these lump sums will be treated for tax purposes in the same way as taxable lump sums received under pensions flexibility more widely,’ the report said.
The Treasury has previously predicted the second hand annuity market would raise 485 million in 2017-2018, and in 2018-2019 would bring in £475 million. After these two initial years it expects there will be a loss from the measure, of £150 million in 2019-2020 and £145 million in 2020-2021.
HMRC expects the policy will cost it £425,000 to improve and install computer systems to administer it, and another £2 million in other costs.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said the government is set to see a boost to its tax returns due to the measure.
‘This is potentially a double win for the government, giving annuity holders the chance to exercise more control over their savings, and raising extra revenue in the process. Our own research indicates a healthy appetite for this market, though that will in the end depend on what kind of price investors are offered in exchange for their annuity income,’ he said.
‘There are still unanswered questions around the regulation of the market and how consumer protection could work; we need to make sure investors don’t end up getting ripped off by their insurance company, for some of them possibly not for the first time.’
To pay for advice, people can take money out of their annuities as an authorised payment – one that is allowed and one that won’t be charged for, the HMRC document said. Previously any money taken out of an annuity would be an unauthorised payment, and there would be a charge from the government, said Claire Trott, director and head of pensions technical at Talbot and Muir.
The document suggests the market for who can buy second hand annuity will be wider than just selling to insurers, Trott added,
The document outlines the tax rules on buying the annuity for a number of different parties, including individuals, insurers and companies.
She said this implies these different bodies can buy the annuities.
‘It says if these people bought it then this will be how it will be taxed, it looks to me to be the case that [these parties can buy annuities],’ she said.
Trott said it was really important that people take advice on the second hand annuities market to make sure they get a good deal.
Source: New Model Adviser