RPSM09102640 - Technical Pages: Member benefits: An unsecured pension: Applying the unsecured pension limit in practice: Short term annuities

Applying the unsecured pension limit in practice with a short-term annuity contract

Term of contract

If the term of a short-term annuity contract spans a formal five year review point (so spans two ‘reference periods’) potentially the revised maximum calculated at that point may not accommodate the existing short-term annuity payments. The existing short-term annuity contracts are still bound by the revised maximum, so any excess paid over this revised limit will become an unauthorised member payment.

To ensure this does not become an issue members and scheme administrators may choose to tie the term of any short-term annuity contract purchased to the five year reference period of that particular arrangement.

For the same reason, the future level of unsecured pension provided under existing short- term annuity contracts also needs to be considered before any of the remaining unsecured pension fund is used to purchase a lifetime annuity contract, or where the member is considering increasing funds through additional fund designation. This is to ensure that the revised limit imposed following those review triggers can accommodate that existing short- term annuity income.

Applying the limit

The unsecured pension paid to a member from a short-term annuity contract must not result in the maximum unsecured pension payments permitted under the arrangement the contract was purchased from being breached.

When a short-term annuity contract is purchased the scheme administrator must consider the level of unsecured pension already provided for (either as income withdrawal or through other short-term annuity contracts) under the unsecured pension fund in that pension year. The scheme administrator also needs to consider any income which will be provided under those existing short-term annuity contracts later on in that current pension year.

The scheme administrator also has to consider the position for future pension years.

RPSM09102650 gives an example.