Selling Pensions

Selling pensions is not actually an accurate term in regards to what you may do with your pension. Selling pensions may however, refer to the practice of using your pension funds to purchase an annuity for the rest of your life. This can be seen as selling pensions as you are providing your pension fund to an insurance company in exchange for an income.

An annuity is one of the options you may take from your pension when you reach your retirement age. Two other options that you may take upon retirement age are that of a scheme pension (this is similar to an annuity but applies specifically to Defined Benefit Schemes) or income drawdown.

Income drawdown does not involve ‘selling pensions’ as such, in fact it uses your pension funds to provide you with an income directly, leaving you with total control over the funds.

An annuity (i.e. selling pensions) requires you to lose control of your pension funds in return of the annuity payment as you are effectively exchanging it. The insurance company will in turn pay you an income for the rest of your life based on your pension total calculated against annuity rates and other factors such as your current age.

When selling pensions to purchase an annuity you may not alter the terms it is taken under after your initial choice. This choice must be made when you first purchase it and requires you to decide on what basis you want to take the annuity (i.e. single life, joint life etc), what frequency you want it to pay out (i.e. monthly, quarterly, annually etc.) and any death benefits you want to be provided such as the guarantee period.

In contrast, income drawdown allows you to change the amount of pension income you take each year, to switch funds you hold your pension in, to alter the frequency you take income payments and even provides a wider array of death benefits. Despite these advantages however, income drawdown may possibly use up your entire pension fund before your need for an income ends, whereas an annuity pays out for life, thus showing the appeal of selling pensions.

However, with either income drawdown or selling pensions to purchase an annuity you are entitled to take up to 25% of your fund as tax free cash lump sum before you begin taking the income payments. The lump sum 25% is yours to use however you wish, however it may not be reinvested back into your pension.