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
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
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.
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.
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
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.
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.