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 their future income payments in favor of a lump sum payment. Annuities are typically designed to offer a steady stream of income for the owner either immediately or at some point in the future. However, a secondary market annuity allows an investor to take the one-time payment instead of a stream of payments over many years.

Key Takeaways

  • A secondary market annuity (SMA) is a transaction in which an income annuity is traded in favor of a lump sum payment.
  • Receiving annuity payments over many years may not be ideal for everyone; an SMA allows for the sale of the annuity for a fixed price.
  • Buyers of secondary market annuities can get paid a steady income stream with an attractive interest rate. They pay the lump sum to buy the SMA and then receive the income payments 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.
  • Typically, secondary market annuities cannot be sold; the buyer must hold on to it for the life of the contract.

Understanding a Secondary Market Annuity (SMA)

Secondary market annuities began in the 1980s and have become a profitable business, catering to those who wish to receive a lump sum of cash and those who wish for high-yield investments with little to no risk.

Purchasing an annuity involves the investor paying for it via a series of payments, such as monthly, or as a lump sum payment. In turn, the financial provider, which might be an insurance company, agrees to pay back the owner a steady stream of payments.

If you have an annuity, it means you collect annual or monthly 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

Typically, annuities, with their continued, fixed income stream are ideal for individuals in retirement, who are guaranteed income during a period of their life when they won't be receiving a steady salary or wage. 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 to a buyer interested in the annuity.

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.

Secondary Market Annuity (SMA) Process

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 another entity. The annuity is still paid in the same way, but the recipient is different.

Special Considerations

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.