RPSM09102650 - Technical Pages: Member benefits: An unsecured pension: Applying the unsecured pension limit in practice: Example with a short term annuity contract

An example of applying the unsecured pension limit with a short-term annuity contract

Nnenna drew benefits from an arrangement as an unsecured pension on 1 January 2007. The maximum unsecured pension that could be paid from the unsecured pension fund as calculated at that point was £5,000 per annum.

This limit applies for the pension year running from 1 January 2007 to 31 December 2007 and sequentially for the next four pension years.

A short-term annuity contract is purchased from the unsecured pension fund on 1 January 2007 that provides Nnenna with a yearly income of £3,000 per annum for five years, payable in monthly instalments (on the last day of the month).

On 1 August 2007 Nnenna decides to secure a further income through a short-term annuity contract. The scheme administrator needs to consider both the £1,750 of pension paid to Nnenna already during the year from the annuity contract (seven monthly instalments of £250) and also the pension that contract will pay out to her in the remaining months of the pension year (£1,250).

The scheme administrator also has to consider what will happen in the next (and subsequent) pension years, where they know a similar pension of £3,000 will be paid.

As such the scheme administrator only purchases a short-term annuity contract that provides Nnenna with an annual pension of no more than £2,000 per annum.