What Is a Secondary Market Annuity (SMA)?

A secondary market annuity (SMA) is a transaction in which the present owner of an income annuity trades his or her future income payments in favor of a lump-sum payment.

Understanding Secondary Market Annuities (SMAs)

If you have an annuity, it means you collect annual payments, usually for the rest of your life. Examples of annuity income streams include the following:

  • Insurance money
  • Lottery payoffs
  • Lawsuit settlements
  • Money left to someone as part of a will

Depending on your situation, receiving annuity payments over several years may not be ideal, and you may be better off selling the annuity for a fixed price.

From the point of view of the buyer, secondary market annuities tend to have high interest rates and low risk, so they are a good long-term investment. Buyers of secondary market annuities should be financially stable enough to be able to invest a large amount of money without the option of pulling it out.

How Does a Secondary Market Annuity Work?

Secondary market annuities are often bought from the original owner with some type of involvement from intermediaries and courts. SMAs are usually underwritten by credit-rated insurance companies, the common issuers of the underlying annuities.

A secondary market annuity buyer can expect to receive annual payments and an interest rate, depending on the terms of the annuity. Compared to similar annuity products, yields on secondary market annuities are typically higher because SMAs are sold at a discount to realize a lump-sum payment in advance. The typical terms for secondary market annuities range from five to 20 years, but they can be as short as one year or as long as 35. Secondary market annuities with deferred start dates and those that apply to longer amounts of time typically have the highest yields.

Once the transfer is made, the buyer of the secondary market annuity will receive payments from the original annuity insurance company or other entity. The annuity is still paid in the same way, but the recipient is different.

What Should You Consider Before Purchasing a Secondary Market Annuity?

Typically, secondary market annuities cannot be sold; the buyer must hold on to it for the life of the contract. The buyer cannot take out an advance on the payments. Also, there are often bureaucratic issues in the court that prevent secondary market annuities from being approved, so it might take longer than expected for a buyer to acquire the annuity and start receiving payments.