Annuities are a proven way to secure reliable income in retirement, but until the payout phase, they can limit your access to cash. If liquidity becomes an urgent need, a secondary market annuity (SMA) can offer a solution, allowing you to sell your future payments for an immediate lump sum. In return, the secondary annuity buyer gains the predictable income stream at a discount. 

Explore what SMAs are, key considerations, and how to market annuities when needed. This should only be considered by the annuitant as a last resort for accessing cash. Like any financial decision it is important to consider all options before making a decision. 

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What is a secondary market annuity?

An SMA is a financial product in which the original owner of an annuity sells some or all of their future payments in exchange for a lump sum of cash. While primary annuities are purchased directly from an insurance company, SMAs are bought and sold on secondary markets.

People choose to sell SMAs for a variety of reasons, but it’s usually because they need fast access to cash. In this process, the annuitant transfers their rights to future payments to a buyer for a discounted price. This typically results in large tax consequences for the seller. 

What is a secondary market annuity buyer?

An SMA buyer is an individual or entity willing to purchase an SMA to secure guaranteed payments. Buyers typically include high-net-worth individuals, institutional investors, and specialized firms seeking stable, long-term yields and willing to lock up capital for an extended period. The buyer provides the seller with a lump-sum cash payment, effectively taking ownership of the annuity’s income stream once it enters the payout phase. 

SMA purchase: Step-by-step process 

Purchasing an SMA involves several key steps to ensure both legal and financial compliance. Here’s an overview.

Finding a seller

The first step is to identify someone looking to sell their annuity. Brokers, financial advisors, and specialized platforms can connect potential buyers with annuity holders seeking a cash payout. Buyers should carefully review the seller’s annuity terms, such as payment schedules and amounts, to determine whether the investment aligns with their objectives. 

Underwriting by credit-rated insurer

Once you’ve identified a potential deal, underwriting will verify its legitimacy and confirm the annuity issuer is a reputable, highly-rated insurance company. Assessing the insurer’s creditworthiness is critical, as it ensures the buyer will receive the future payments as scheduled and can help mitigates investment risk. 

Court or order approval

For SMAs involving structured settlements, court approval is typically required. This legal step protects the seller by confirming the sale is in their best interest and complies with state and federal regulations. As part of this process, courts review the terms of the SMA, including the discount price offered to the seller, to prevent exploitation. 

Assignment of payment streams

After all approvals, the rights to future payments are legally assigned to the buyer. Both parties sign a formal agreement transferring the annuity ownership from the seller to the buyer. Once complete, the seller receives their lump sum payment and the buyer begins receiving the scheduled payments from the insurer during the annuity’s payout phase.

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Pros and cons of buying secondary market annuities

While SMAs can provide stable returns, they also involve certain risks and limitations that buyers should weigh carefully before committing. Here’s a breakdown of the potential benefits and drawbacks. 

Pros

Discounted entry

SMAs allow investors to purchase the rights to future annuity payments for less than their face value. Buying at this discounted rate can give buyers access to a predictable income stream without paying the full cost of the underlying annuity. 

Higher yields

Because of the discounted purchase, the effective return on investment is often higher than traditional fixed income products. The payment delivers steady, above-market yields, making them appealing for income-focused investors. 

Simplified acquisition

Since SMAs involve existing annuity contracts, buyers bypass the usual process of setting up a new annuity. This can make them easier to acquire, with flexibility to shop around for payment streams that match investment goals. The process itself may take longer than expected to complete the acquisition and there may be a limited market for these.

Cons

Limited liquidity

SMAs are illiquid, long-term investments, so buyers must be prepared to hold them for extended periods until payments are received. Once purchased, it is often impossible to resell the rights to payments, so buyers must have other ways to access capital before locking up funds. 

Higher risk

Unlike primary annuities, SMAs generally lack the protection of state guaranty associations. If the insurer defaults, buyers may face losses. This can make due diligence on the issuer’s creditworthiness essential. 

More complex closing

Finalizing an SMA purchase may involve court approvals, legal reviews, and additional documentation. These steps can add time, cost, and complexity to the transaction.  

What to know before buying a structured settlement annuity 

Structured settlement annuities (SSAs) are a distinct type of SMA that come with additional legal and procedural considerations. These products typically originate from court cases, such as personal injury or wrongful death claims, where the recipient is awarded periodic payments instead of a lump sum. 

Because of their legal origin, structured settlement sales generally require court approval. This process ensures that the seller is not being taken advantage of, but SSA buyers also benefit from the additional oversight, which confirms the legitimacy of the contract. Courts review the discount terms to make sure they are fair and reasonable for the seller. 

Purchase a primary annuity with Gainbridge

If you’re looking for predictable income and long-term security, an annuity may fit your financial goals. With competitive rates, transparent terms, and a fully digital experience, Gainbridge’s innovative platform makes contributing to annuities straightforward. 

Explore Gainbridge to learn more about the range of options available.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10% federal income tax penalty. Distributions of taxable amounts from a nonqualified annuity may also be subject to an additional 3.8% federal tax on net investment income.