How and when to you sell your annuity

Think of annuities as a form of debt that is owned to you. However rather than receiving the payment in one lump sum after a period of time, that debt is paid to you in small increments over several installments. Some common incurrence of such debts would be in the case of liabilities owned due to civil damages against your person, or if you purchased a particular type of insurance / pension plan option that pays you a regular dividend over several years.  

Normally annuities have a percentage interest attached to them, such that the total funds paid to you would be greater than if you are to be paid at the end of a longer period of time. This percentage interest should cover two things 1: The cost of time – which normally includes the cost of real inflation which should account for currency depreciation and cost of goods inflation. In the case of personal investments (I.e. pension plans) this interest rate should be higher than the bank rates. In the case of annuities awarded to you in the case of personal / civil disputes, the interest would probably be equal to that of bank rates. 

Selling your annuity to a third party

If you were to sell your annuity to another party, you will not be able to collect the entire value of the annuity owed to you. How much lower will you have to sell? Theoretically, at the minimum you will have to give them an interest discount equivalent to what they would get should they invest their cash in a bank deposit. However as an investor, they will not be interested in such a small discount. That is because you still have to account for the risk and inconvenience of collection involved. Hence you have to give them a further discount to cover these risks.

But then remember, buyers of debt have to cover for their own cost of operation plus their profit margin to consider – which they will then pass on to you. So for example, if you are owed 100 dollars to be paid after ten months, you will probably be paid 11 dollars a month (assuming bank rate of 6-8% and in the case of a personal investment, you will put on an extra profit 2-4%). When you sell this to a debt buyer, you would most likely sell it to him for 90-95 dollars, single payment to you on the day of sale. Hence the debt buyer collects the entire 10 dollars profit that you should have collected PLUS the 5-10 extra dollars profit.

You are definitely on the financial losing end when you decide to sell your annuity. This means that you normally would sell an annuity only on two occasions.

1. There is a much better investment opportunity immediately available. 
2. The second reason would be that you have immediate need for cash (i.e. to pay for medical expenses).

Furthermore, to assess if you should sell your annuity, consider your alternatives for sources of cash such as incurring bank loans, or debt. Note that if you can get a bank business loan, the interest you will have to pay them, may actually be much lower than the loss of interest plus actual profit loss of selling your annuity.  Of course, choosing this option will have a double risk attached (i.e. risk of not collecting on your annuity, plus risk of not being able to pay debt to the bank thus leading to further complications) which you will then have to match against the potential returns of  any such investment.

Definitely look for a broker or preferably yet, an asset manager. Buyers of debt know that for all the reasons that you would sell your debt, that you can not help but have to give them a bigger discount. As such they will try to get your annuity for all its worth at your expense. Furthermore you will be in no mental position to bargain. Have the asset manager, professionally asses your obligations, income, assets, and risk threshold and then have him give you options.  Use your asset manager to present to you all your financial options and should selling your annuity be the best option available, then ensure that he can either direct you to a broker, who will then be able to get the best bid for your annuity.

NEXT ARTICLE >>