Secondary market annuities (SMAs) allow annuity owners to sell the future payments of their annuity to a third-party company for a lump sum payment. This allows owners to receive an immediate cash payment, usually at a discounted rate, instead of waiting for future payments. The exchange is less money now or more money spread over a much longer period of time. To determine if this might be a good solution for your situation, you may want to consult with a financial advisor who can help you figure it all out.
What Are Secondary Market Annuities?
People may have annuities for several reasons. Primary market annuities include those purchased by people for long-term income security; the primary market can also include lottery and lawsuit winners.
Income annuities provide lifetime payments, but people sometimes prefer a lump-sum cash payment. This allows them to receive a portion of the total they would receive right now instead of waiting for each payment down the road. In this case, annuity owners can sell them on the secondary market. Annuities sold on the secondary market are what are known as secondary market annuities (SMAs).
Those who purchase an SMA pay a lump sum to buy it from the primary owner, then they start to receive payments from the annuity. Because SMAs are typically purchased at a discount, they can have higher yields than primary market annuities. However, SMAs usually cannot be sold once purchased from the primary owner. In addition, SMAs usually have a fixed term rather than issuing payments for life. The typical term for an SMA is 20 years, but you can often find SMAs with both longer and shorter terms.
When Are Annuities Sold on the Secondary Market?
There are several reasons someone might want to keep their annuity payments as it can be a great income source in retirement. We often talk about income annuities, which people purchase as a form of income security. Within income annuities, there are several types, such as immediate and deferred annuities. However, people can also receive annuity payments due to any of the following:
- Lottery winnings
- Insurance claims
- Money left in a will
Those who receive annuity payments in these situations may be more likely to sell them to the secondary market. For example, someone who wins the lottery may be more inclined to opt for a lump-sum payment by selling their annuity in the secondary market and taking a large chunk of the money owed right now.
How to Buy SMAs
When you purchase an SMA, you typically buy from a third-party seller, and the courts may also be involved in the process. As mentioned earlier, SMAs tend to have relatively high-interest rates compared to primary market annuities. You can often find SMAs with yields of 3% to 5%.
Some SMAs have cost of living adjustments (COLAs), though most do not. Most also issue monthly payments, but they can also be quarterly or annual. You will even find some that pay a single lump-sum payment in the future. In general, though, SMAs have payment schemes like primary market annuities. Monthly payments are the most common.
Pros and Cons of SMAs
From the perspective of the buyer, there are several reasons SMAs can be attractive, but there can also be drawbacks to buying them, too. Let’s take a look at the pros and cons of buying secondary market annuities.
- Yields can be higher than primary market annuities due to their discounted price.
- Payments are usually guaranteed, such as when the annuity is issued by an insurance company.
- Not subject to market fluctuations, unlike stocks and other investments.
- SMAs are sometimes difficult to transfer, which could result in delays in receiving payments.
- Unlike primary market annuities, SMAs have an end date and do not issue payments for life.
- Usually cannot be resold.
It’s important to understand how SMAs work before making a buying decision. Weighing the pros and cons can give you a good perspective on whether it is a good investment decision that will help you reach your retirement goals.
SMAs allow annuity owners to sell their annuities at a discount. In return, they receive a lump-sum payout. The buyer of the SMA then receives regular payments, just like the original owner did. However, unlike primary market annuities, SMAs usually have an end date. Plus, SMAs usually cannot be resold. But they can still be attractive to buyers because they tend to offer higher interest rates and guaranteed payments.
Tips for Investing in Annuities
- Annuities provide regular payments, which can be a nice boost to your retirement income. Speaking with a financial advisor can help you determine if it’s a strong investment for your financial goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Will your investments be enough to cover your expenses in retirement? If not, an annuity could help you pick up the tab. Find out how much your investments might grow with our investment calculator.
- There is more than just one type of annuity. For example, if you purchase an income annuity, you’ll have a choice between fixed vs. variable annuities in addition to immediate vs. deferred annuities. The best choice depends on your situation and goals.
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