• A contract bought from an insurance company using crystalised or uncrystalised funds.
• The income depends on the rate offered from the company and the amount used to buy the annuity
• If being bought from uncrystalised funds a PCLS can be paid
• Great for members who have a low ATR, low capacity for loss, need guaranteed income and who don’t want to manage a pension fund

HMRC requirements

If the annuity was bought before 6^th April 2015, HMRC requires that it:

• be bought from an insurance company the member could choose;
• be payable at least once a year, either in advance or arrears, for the member’s life;
• only allow the amount paid each year to either stay level or go up or down as prescribed by HMRC regulations,
• reductions beyond those prescribed means all future payments from that annuity will be unauthorised member payments and taxed accordingly;
• not allow the payment of a capital sum (other than annuity protection) on the member’s death;
• not be capable of assignment or surrender (unless under a pension sharing order); and
• could offer the option of a guarantee period of no more than ten years or an annuity protection lump sum.

The annuity can fluctuate in payment in 5 ways:

1. Indexation

 a. Changes in line with RPI, the market value of freely marketable assets or an index reflecting the value of freely marketable assets

 b. The change cannot be greater than the index’s change

2. With Profit Variations

 a. Reflects the variable bonuses from with profit funds

3. Indexation/with profits –

 a. Combination of two first two options

4. Selected growth rates –

 a. Linked to options 1, 2 or 3

5. Flexible withdrawals –

 a. Linked to options 1, 2 or 3

 b. A review is conducted at least every 3 years

 c. The max amount of income payable is 120% of the annual rate

If the annuity was bought on or after 6^th April 2015, HMRC requires that it:

• the annuity must be purchased from an insurance company,
• the annuity must be payable for the member’s life or, if later, the expiry of the guarantee period and there is no limit to how long the guarantee period can last
• there is nothing stopping the income paid from a lifetime annuity reducing by more than an amount prescribed by

Difference between a conventional lifetime annuity and a flexible lifetime annuity

A member who starts to receive an income from a conventional lifetime annuity is not considered to have flexibly accessed their pension benefits and so they retain the full annual allowance for money purchase pension input.

However, a member who starts to receive an income from a flexible lifetime annuity is considered to have flexibly accessed their benefits and so will become subject to the MPAA.

Death benefits

A lifetime annuity can offer the following benefits:

• Survivor’s annuity
  • Usually expressed as a percentage of the annuity
  • Tax treatment is determined by the age of death of the previous holder
  • If it is being paid to a child of the member then is it paid until the child is no longer dependent, dying or married
  • For someone who is not a child the income is only stopped due to married or death
• Guarantee period
  • No limit to the guarantee period
  • Tax treatment is determined by the age of death of the previous holder
  • Everything else is the same as a scheme pension

Transfer of a lifetime annuity

HMRC allow a lifetime annuity to be transferred from one insurance company to another, although there is no requirement for an insurance company to either make or accept such a transfer

If a transfer can be agreed, then the terms of the annuity can be re-shaped by the receiving insurance company

Annuity Rates

Two main factors are long term bond yields and longevity expectations

For long term bond yields:

• the return from gilts/bonds provides a regular stream of income, which the insurance company uses to pay the regular income streams under the annuity. Therefore the higher the yield the better the annuity rates.

For longevity expectations

• the insurance company using unisex mortality tables to estimate the length of time they may expect to be paying the income for.
• The longer the time the company expects the annuity rate will be reduced.
• They will also factor in current health and lifestyle
• Impaired life annuities have increased rates due to the lower than average life expectancy (sub 5 years) due to illness
• Enhanced annuities are similar but members get higher rates if they smoke or have diabetes for example

Investment linked annuities

As well as traditional gilt backed annuities, investment linked annuities are available. The most common ones are with-profit annuities and unit-linked annuities.

• With-profit annuities
  • invested in the life office’s with-profit fund.
  • The income reflects the investment performance of the with-profit fund.
  • the returns on the with-profit fund are paid as bonuses;
  • the annuitant selects an anticipated bonus rate based on the level of bonus that they feel the underlying investments will achieve, e.g. 3%;
  • the initial level of income paid reflects the anticipated bonus rate selected; and
  • the higher the selected anticipated bonus rate, the higher the initial income, although if the total bonus actually declared in a given year is less than that selected, the initial income will be reduced the following year to reflect the fall.
• Unit Linked annuities
  • Works in a similar way to with profit annuities
  • There is no smoothing like a with profits annuity
  • the initial income is calculated in monetary terms and this is converted into a number of ‘notional units’;
  • the level of the initial income is based on the provider’s actuarial tables which take into account the annuitant’s age, their beneficiary’s age, the size of the pension fund and any optional benefits that have been selected
  • the value of the units at any time determines the amount of the annuity payment meaning that the level of income can fluctuate in line with the performance of the underlying investments;
  • the annuitant selects an anticipated growth rate at outset. The higher the rate selected, the higher the initial income.
  • units are then encashed on a set basis to provide the income, with the number of units encashed in line with the anticipated growth rate;
  • if the underlying growth is in line with the anticipated growth rate, the annuitant’s income will remain level.