RPSM09103640 - Technical Pages: Member benefits: Drawdown pension:
This guidance has been written from the members’ perspective.
Short-term annuities
What is a short-term annuity?
What is the difference between short-term annuities and income withdrawal from capped/flexible drawdown?
Can I take a short-term annuity and income withdrawal from either capped drawdown or flexible drawdown from the same pension scheme/arrangement at the same time?
How much can I be paid from a short-term annuity?
How often does a short-term annuity need to be reviewed?
What happens at age 75?
What happens to my short-term annuity when I die?
What is a short-term annuity?
You can use part of your drawdown pension fund to buy a short-term annuity contract from an insurance company of your choice. A short-term annuity contract will pay you a fixed amount each year. The contract can last for up to five years. It does not have to come to an end when you are 75.
What is the difference between short-term annuities and income withdrawal from capped/flexible drawdown?
With a short-term annuity contract you are paid by the insurance company rather than directly from your drawdown pension fund. The amount you get each year will be a pre set amount. This could for example be a set amount of money or the amount paid could be dependent on the performance of an investment index. Unlike income withdrawal from either capped or flexible drawdown you cannot choose to change the amount you get each year.
With income withdrawal from capped and flexible drawdown the amount you receive is paid directly from your capped/flexible drawdown pension fund. You can choose to change the amount you will be paid each year if your scheme allows.
Can I take a short-term annuity and income withdrawal from either capped drawdown or flexible drawdown from the same pension scheme/arrangement at the same time?
Yes, as long as your scheme rules allow it, you can use short-term annuities alongside income withdrawal from both capped and flexible drawdown pensions.
How much can I be paid from a short-term annuity?
There is no minimum amount.
If a short-term annuity is purchased from a drawdown pension fund to which flexible drawdown applies there is no upper limit on the amount your short-term annuity can pay.
Where a short term annuity is bought using funds from a capped drawdown pension fund there is an upper limit on the amount your short-term annuity can pay you. The amount payable from a short-term annuity contract plus the amount of any income withdrawal from the capped drawdown pension fund in a pension year cannot be more than your maximum drawdown pension.
Example
Heather’s maximum drawdown pension is £5,000 per pension year. Heather has bought a short-term annuity using funds from her drawdown pension fund. The annuity pays Heather £3,000 a year in equal monthly amounts.
Heather wants to take some drawdown pension directly from her drawdown pension fund as income withdrawal. The £3,000 short-term annuity reduces the amount of income withdrawal Heather can be paid. The maximum income withdrawal on top of the short term annuity Heather can have each year is £2,000 (£5,000 - £3,000 = £2,000).
How often does a short-term annuity need to be reviewed?
A short-term annuity can be for a period of up to five years. However if you are using capped drawdown your maximum drawdown pension will be reviewed
- at least every three years if you are under 75, and
- every year when you are 75 or older.
When considering the length and amount of a short-term annuity contract you may buy you need to remember that your maximum drawdown pension could change in the middle of the term of the annuity. If your maximum drawdown pension goes below the amount payable by your short-term annuity contract the excess amount will be an unauthorised payment
What happens at age 75?
Your short-term annuity can continue past your 75th birthday. You can also buy a short-term annuity when you are 75 or older,
What happens to my short-term annuity when I die?
When you buy a short-term annuity you can choose one that is guaranteed to make payments for a set period. For example if your annuity guarantees to make payments for five years and you die in the middle of this period the annuity contract will continue to make payment after you have died until the end of the term of the contract.
Apart from such guaranteed annuity payment a short-term annuity contract cannot provide a benefit after your death.
| Glossary (RPSM20000000) |
