Description

A lifetime annuity purchased using funds from an existing pension policy at the vesting date.

The term is usually applied to funds from occupational (Employers) schemes but sometimes used generically to include Personal Pension Pension Plans (PPP) or Retirement Annuities (RAPs), as well as to annuities arising from assigned and substitute (ex employers) policies and Section 32 Buyout Bonds.

Examples of Use

• Holders of individual (RAPs or PPPs) or occupational (Employer) pension scheme funds to provide a guaranteed level of income.

Advantages

• Simplicity, a lifetime income will be paid in return for a lump sum payment.
• May include escalation for inflation protection.
• Can include protection for spouse and against early death by including a spouse’s pension and/or a minimum guaranteed period.
• Those who purchase a CPA and live for a long time in retirement benefit from ‘mortality gain’, which is the cross subsidisation of those who live a long time in retirement by those who die early in retirement.

Disadvantages

• Rate fixed at outset so no benefit to the annuititant if the general level of annuity rates improves later.
• No potential to benefit from future investment growth
• Design must be fixed at outset e.g. cost of spouse’s pension lost if spouse dies first.
• Possible loss of capital on early death, even if maximum guaranteed period chosen.
• Need to check trust provisions, if any, applicable. Any residual value on death may be payable to estate.
• Scheme may have restrictive rules e.g. maximum guarantee period of 5 years.

Points of Interest

• Annuity design must be considered in detail e.g. guaranteed period escalation etc.
• Health must be taken into account and its effect on the choices available.
• Annuity rates can go up and down but, once purchased, the terms are fixed for life.
• Alternatives methods of securing an income such as Pension Fund Withdrawal, phased retirement, investment linked could also be considered.