Trading Annuities

In the recent shake up of pensions it seems likely that retirees will be able to sell their existing annuities. This indeed offers flexibility, however whether “fair-value” on sale is achieved is another thing. Valuing an annuity is far from trivial. It requires present valuing future cash flows that are dependent on life expectancy. Retail customers are unable to do this for themselves. They are reliant on the potential buyer’s valuation. The up-front valuation for a person in good health who took out an annuity some time ago may appear surprisingly generous. That’s because interest rates have fallen. However you can appear to be better off by selling but in fact your wealth may fall. Suppose you bought an annuity some time ago for £100K and receive £7K per annum. Fair value of this £7K annuity may now be £175K. But the danger is in being duped. Being offered £150K (pocketing £50K profit) may be tempting but it’s far from good value. It is tantamount to giving the buyer a cheque for £25K. How can you guard against this? It’s very difficult. Professional investors often line up counterparties for a simultaneous quote accepting the best. This is not something that the average retail customer will be able to do. Indeed it’s likely that if you do shop around valuations will be done at different times muddying the water further. Therein is the regulatory challenge. How do you stop retail customers getting scalped rather than having a short back and sides in this nascent market?