RPSM09102210 - Technical Pages: Member benefits: An unsecured pension: Short term annuities: Purchasing a short term annuity contract

This guidance only covers members who became entitled to an unsecured pension before 6 April 2011. See RPSM09103500 if pension entitlement arose on or after 6 April 2011.

Purchasing a short term annuity contract

A member can use part (or all) of their unsecured pension to purchase a short-term annuity contract from an insurance company. The unsecured pension will then be paid direct to the member from the insurance company in accordance with the terms of the annuity contract. The unsecured pension fund held in the arrangement will be reduced by the purchase price when the contract is purchased.

The term of that annuity contract cannot be more than five years and must not extend beyond the member’s 75^th birthday. Where the short-term annuity is purchased after 21 June 2010 it can continue after the member’s 75^th birthday. However the term of the annuity still cannot be longer than five years.

The amount that can be paid each year from a short-term annuity is the same as the amount that can be paid under income withdrawal.

The overall limit placed on unsecured pension paid from a money purchase arrangement reflects the level of lifelong pension a particular fund value could generate for the member at a particular point. As a short-term annuity contract cannot pay more than this limit and only for up to 5 years, only part of the unsecured pension fund will be used to purchase that contract (in all but the most exceptional circumstances).

The remaining funds stay invested within the scheme in the unsecured pension fund to generate additional pension benefits at a later date either as additional short-term annuity contracts, income withdrawal payments or through the purchase of a lifetime annuity contract or scheme pension.

Additional pension benefits can be taken before the end of the term of the existing short-term annuity contract. Where income withdrawals are drawn or additional short-term annuity contracts are purchased the scheme administrator must consider the level of unsecured pension already paid, or to be paid, from the existing annuity contract when considering how much additional unsecured pension can be paid or secured.

An example is given on RPSM09102220.