RPSM09101710 - Technical Pages: Member benefits: A secured pension: Lifetime annuity: Definition

Definition of a lifetime annuity

A lifetime annuity contract can only be purchased from a money purchase arrangement. Before the member is 75 it may be purchased from either uncrystallised funds or an unsecured pension fund. On or after the member’s 75^th birthday it will be purchased from an alternatively secured pension fund.

Requirements

To meet the lifetime annuity definition the annuity contract must

• be purchased from an insurance company that the member had the opportunity to select,
• be payable for the member’s life,
• be paid at least once a year, either in advance or in arrears,
• only allow the amount paid each year to either stay level, increase or go down in circumstances prescribed by HMRC regulations - for more details see RPSM09101730,
• not allow the payment, either directly or indirectly, of a capital sum triggered by the member’s death, (apart from annuity protection) (see RPSM09101790), and
• not be capable of assignment or surrender (except to give effect to a pension sharing order). If the annuity is guaranteed to be paid for a set period the annuity may be assigned during that period either by the terms of the member’s will, or by their personal representatives in distributing the member’s estate, to allow

• a testamentary disposition or the rights of those entitled on an intestacy, or
• an appropriation of the annuity to a legacy or a share or interest in an estate.

Conditions imposed on the annuity contract

Any payment or benefit from a lifetime annuity contract is treated as if it was made by the registered pension scheme that purchased the contract. The contract can only provide benefits that are ‘authorised’ under the tax rules. So the pension must meet the lifetime annuity definition, and any benefits provided on the member’s death must conform with the death benefit rules - see RPSM09101830.

Any other payment made by the contract will be an ‘unauthorised’ payment, and taxed as such.

Case law

There is case law (both tax and other) defining what an ‘annuity’ is. The tax rules set out only the form of benefits that may be paid out in respect of funds held in a registered pension scheme and do not determine whether or not a particular contract represents an ‘annuity’. This is for the scheme administrator or insurance company to ascertain, seeking legal opinion where necessary.