The returns people receive when selling their annuities are likely to be “very poor”, the managing director of a pensions firm has warned, after reforms were confirmed this week.

The Government announced on Tuesday that more than five million people will be able to sell their annuity from 6 April 2017.

The government says the move will extend its landmark pension freedoms and create a new secondary annuity market.

People with an existing annuity, and anyone who purchases an annuity in the future, will have the freedom to sell their right to future income streams for an upfront cash sum.

Jamie Smith-Thompson, managing director of Portal Financial, has warned that the returns people will receive when selling their annuities may be on average 25% less than the expected value for a 10 year old annuity, but possibly much higher for older annuities or people whose health has deteriorated.

Furthermore, there is likely to be a significant knock-on effect to newly purchased annuities which could further weaken their value, he said.

People selling annuities will lose value in four main ways based on an average current annuity of £42,000, according to Portal Financial.

These are:

· £500 - £1,200 - estimate of the mandatory financial advice charge as announced by the Government;

· £1,500 - £2,600 – 3%-6% the second-hand annuity 'broker' / exchange charge;

· £2,500 - £4,200 - the 6%-10% return that the buyer (investor) would be looking for from any purchase;

· £250 -£1,000 potential 'administration' charge by the annuity provider for costs associated with administration, as detailed below.

Mr Smith-Thompson said any requirement for medical information prior to the sale could also severely limit what a broker might pay, or even make the policy worthless as the long term value of the policy could be severely impacted if the policyholder’s life expectancy was reduced.

However, the introduction of a second hand annuity market could also have broader ramifications which could drive up costs and might further drive down the value of annuities, he said.

These were:

· As the life insured (including joint lives) no longer has a pecuniary interest in the policy, they will have little interest in notifying the insured of a change in circumstances or, ultimately, death. Therefore insurers may make payments that are not due.

· As the policy may be resold (potentially several times) the ultimate owner may be based outside of the UK. This will add to costs for annuity providers.

· Taxation is likely to change - individual taxation of the previously insured is relatively simple; however, corporate taxation of the newly insured is likely to be more complex adding to the costs.

· Added costs associated with fraud / anti-money laundering issues where a potential buyer is based outside of the UK.

· Who bears the costs associated with administrative issues? While logic says it should be the seller, which will further deplete the sale value, it would be virtually impossible to estimate how many times, if any, a policy might change ownership in the future, Mr Smith-Thompson said.