Fewer than 1 in 5 are likely to cash in their annuity

According to a YouGov survey commissioned by the Institute and Faculty of Actuaries (IFoA) released today (26 April) two thirds of UK pensioners surveyed (68%) report that they would be unlikely to cash in their annuity for a lump sum.

• Respondents said being able to sell their annuity was a good idea in general, but not necessarily a good idea for themselves
• Younger age groups and the less financially secure reported being more likely to sell their annuity
• 55% reported they don’t know what they would do with the lump sum received were they to sell.

Fewer than 1 in 5 (18%) report being likely to do so. The survey, conducted with people aged over 55 with an annuity, found that the likelihood of selling an annuity is higher amongst the younger age groups (34% for those 55-59 years old) and the less financially secure (28%). 

If it were possible to sell their annuity product, 55% indicated they ‘don’t know’ what they would do with the lump sum received.

Respondents would seek to receive on average 94% of the value* of their annuity as a cash lump sum if they were to sell their policy.  This amount could be significantly in excess of the offers made by potential buyers.  Market pricing has, though, yet to be established.

Many respondents recognised the need for independent financial advice in order to help them make an informed decision, with a small majority (54%) indicating they would seek this. However the amount willing to be spent on independent financial advice, at an average of £162, could be well below the cost of such advice.

Fiona Morrison, President of the IFoA, comments,

“The research found a general high level of awareness of the Government’s plans for a secondary annuity market.  While many reported that the plans in principle were a good idea, few actually reported wanting to take advantage of it themselves.

“People tend to underestimate how long they will live.  This, coupled with the fact that people reported not having a clear idea of what to do with the lump sum they would receive from cashing in their annuity, means it is crucial for adequate consumer protection to be put in place.  There is a real risk that many people could run out of money in retirement and end up falling back on the Government for support.

“There may be unrealistic expectations on the amount respondents would receive from cashing in their annuity and also how much they are prepared to pay for financial advice.  Many of those who are most interested in cashing in their annuity are also the most likely to try and organise the sale themselves rather than get a financial advisor to organise quotations for them.  This could create the possibility of mis-selling.

“We are encouraged that the FCA and HMRC are consulting on the secondary annuity market and the risks involved, as consumer protection should be a paramount consideration into how a secondary annuity market could work.  Consideration will need to be given to ensure individuals access the appropriate level of advice prior to selling their annuity.  The risks and costs of customer detriment from these new freedoms may well outweigh the benefits.”

~ENDS~

* In the survey, the value of their annuity was defined as “the total of the expected future payments from their annuity”.

Editorial notes:

About the YouGov Survey

All figures, unless otherwise stated, are from YouGov Plc.  Total sample size was 2017 adults over 55 with an annuity they were currently receiving payments from. Fieldwork was undertaken between 22nd February – 2nd March 2016.  The survey was carried out online.

About the Institute and Faculty of Actuaries

The Institute and Faculty of Actuaries (IFoA) is a royal chartered, not-for-profit, professional body.

Research undertaken by the IFoA is not commercial.  As a learned society, research helps us to fulfil our royal charter requirements to further actuarial science and serve the public interest. 

Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.

Members of the IFoA have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.

Members are governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of actuaries in society.

The IFoA is available to provide independent expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.