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The average size would be less than £50,000 and the transaction costs would be very high as compared to say orthodox gilts.
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The insurer would want evidence of health. As we’re talking of people in their twilight or at least autumn years, the costs would be high, perhaps as much as £500. The insurer would be reluc-tant to bear it if there’s no certainty of getting the business. The annuitant will therefore have to produce it at his own expense (much like a Home Information Pack for house sale). That would certainly help although much depends upon what the doctor is prepared to reveal in an open document.
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The insurer would wish to be satisfied that he was of sound mind; the fear being that if he blows his pension and runs into difficulties he’d top himself.
These are strong reasons for putting a dampener on the idea but what will kill it are the next two points:
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What the insurance company would be buying is an income stream. It is no longer an annuity in the Insurance Companies Act sense. Think of the tax treatment of traded endowments where the profit is treated as realised gains. In this case we have a wasting asset as the income ceases on death with no return of capital. I’m not a tax expert but I suspect it will be taxed in the same way as a leasehold asset. One approach might be to tax the same way as purchased life annuities with a capital element. Typically under current investment conditions a quarter of the annual income would be taxable.
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The original insurer would no doubt send certificate of existence for completion to the annuitant but the latter would have no incentive to complete them as he has no interest in the income he’d sold off. So the original insurer might cease payment even though the annuitant is still alive.
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My guess is that if one insurance company sold an annuity for a consideration of £100,000 and was asked to buy it back (not to extinguish it but as an asset) it would only offer £60,000.
What we have here is modern alchemy, turning gold into dross.
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