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  Open annuity   Unit linked annuity
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Open annuity
The attraction of an open annuity is that for those with larger pension funds of £250,000 or more, that are not wholly dependent on this money for their income at retirement, can establish open annuities where part of the residual pension fund can be passed to the beneficiaries, even if the annuitant is 75 years or older.

Unlike a conventional annuity such as a pension annuity or purchased life annuity where the funds are pooled and the underlying assets are invested in gilt-edged securities, an open annuity is operated within protected cells creating a non-pooling annuity. This means that if any deficits occur these are limited to the funds in each protected cell and any surplus will increase the value of the cell.

With a protected cell the insurance company allows the annuitant to purchase a preference share in the company. On the death of the annuitant any assets in the protected cell are declared as a profit for the insurance company and the owner of the cell, this being the beneficiaries, can sell or redeem the value of the preference share to the insurance company. It is not possible to redeem the value of the protected cell while the annuitant is alive.

Under UK law it is not possible to operate protected cells but the Inland Revenue requires open annuities to be purchased from a EU insurance company. This being the case, many open annuities are established through Gibraltar that operates similar regulatory compliance as that of the UK.

The open annuity can be invested in equities or fixed interest securities to reflect the risk the annuitant is willing to take although the options are more restricted than those under pension drawdown. The amount of income payable is not fixed and will vary relative to the value of the fund and this income will be subject to PAYE taxation. It is also possible to have a survivors pension to provide for a spouse and on the death of the annuitant the beneficiary will receive the residual fund within the protected cell.

An open annuity is suitable where the annuitant has a variety of retirement incomes and wished to protect capital for their beneficiaries on death, such as from a self invested personal pension scheme (SIPPs), small self administered scheme (SSAS) or other private pensions. Due to the higher risks associated with an open annuity, advice should be sought from an independent financial adviser (IFA).

Open annuities are not suitable for those that want the certainty of a guaranteed income, such as from pension annuities. Open annuities do not benefit from mortality profit as a result of the early death of other annuitants.

Unit linked annuity
Operating in a similar way to with profit annuities, a unit linked annuitant makes an assumption about the growth rate of the unit price of the underlying assets. The higher the assumed growth rate the higher will be the initial income. However, if the actual growth rate is less than the assumed growth rate the future income will fall.

If the underlying assets are equities, the income payments made are likely to be more volatile compared to a with profits annuity. Although in the long term equities have produced the greatest returns, there is no guarantee that this can continue in the short term. The higher associated risks with unit linked annuities has meant that they are considerably less popular than conventional or with profit annuities and only people that can rely on other sources of pension income can take the risks associated with equity based annuity.

At retirement the individual can use a pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity and this should be considered in addition to a unit linked annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.

Temporary annuity
This type of annuity is available for a lump sum payment only such as to a purchased life annuity, not a pension fund, and the benefits payable for the fixed period chosen or until the death of the annuitant, whichever is the sooner.

Therefore a temporary annuity is paid for a fixed period of time, say 10 or 15 years, and once this time has elapsed or the annuitant dies, the annuity payments stop. Temporary annuities have a shorter period of payment than lifetime annuities and the income paid for given lump sum is greater.

Deferred annuity
A deferred annuity have in the past been used for both a pension annuity (compulsory purchase annuity) connected with a pension fund or a purchased life annuity, but are more frequently used for immediately needs annuities. It offers an annuity that can be payable at some date in the future. The period between the start date and the maturity date is known as the deferred period and on maturity an income is paid for the rest of the annuitants life.

A deferred period is expensive as there is a cost of delay. During the deferred period it is usual for the annuitant to continue to pay regular premiums. In the event of the death of the annuitant during the deferred period, the premiums are typically returned to the estate and this may also include interest depending on the provider's terms. For purchase life annuities a cash option instead of the annuity can be offered.

A deferred annuity as part of an immediate needs annuity could be used when a relative enters a nursing home. If the prognosis is they will live for less than 2 years, then a deferred period of 2 years would be chosen. The estate would pay for the first two years of nursing home care and the deferred annuity would pay subsequent long term care costs for the rest of the annuitants life.

For many people conventional annuities from their existing provider offer "poor value for money". As deferred annuities are rarely offered by providers to individuals, one way to defer an conventional annuity purchase is a With Profits annuity. Here the annuitant can receive an income from an annuity and use a future annuity transfer option to convert to a conventional annuity at a later date.

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