RPSM09102220 - Technical Pages: Member benefits: An unsecured pension: Short term annuities: Example

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.

An example of purchasing a short-term annuity contract

James decides to take benefits from all of his funds (worth £40,000) in a money purchase arrangement.

James takes his maximum tax free pension commencement lump sum of £10,000. He chooses to take the rest as an unsecured pension, so has an unsecured pension fund of £30,000.

The maximum unsecured pension James can take each year is £3000.

James buys a short-term annuity contract providing a £2,000 each year for five years. This costs £9000, which leaves a remaining unsecured pension fund of £21,000 (£30,000 - £9000).

A few months later James decides he needs a slightly higher income.

If the scheme permits, he can choose to draw an additional £1000 unsecured pension, either through income withdrawal or by using part of his fund to secure another short-term annuity contract at that level. This is calculated by taking the level of income paid or payable in that year from the existing short-term annuity contract from the overall maximum annual amount of unsecured pension permitted - so £3000 - £2000 = £1000.