Even annuities can be flexible!
These FAQ are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of current legislation, which may change.01 April 2015 Back to results
In amongst all the pension flexibility changes introduced from 6 April 2015, there was also some flexibility introduced for lifetime annuities. This flexibility only applies to lifetime annuities set-up from 6 April 2015.
- The maximum guaranteed period for a lifetime annuity set-up before 6 April 2015 was ten years. This restriction was removed from 6 April 2015 for any lifetime annuities set-up from that date onwards. This means that a lifetime annuity can be paid after the member’s death for any period that is set out in the annuity contract. In other words, it can provide a guarantee of more than ten years.
- Remaining annuity payments under a guaranteed period can be paid to beneficiaries as a lump sum, providing the value is £30,000 or less and the payment is made after 5 April 2015. This allows beneficiaries to receive pension payments as a lump sum if they wish, rather than having to spread these out over several years. The full lump sum would be taxed regardless of whether the annuity instalments were being paid tax-free or not.
- The annual rate of a lifetime annuity set-up after 5 April 2015 can go down as well as up. For example, an annuity could be set-up that will decrease when a person becomes eligible for the state pension.
- The requirement that a member needs to be given an open market option was replaced with a provision under DWP legislation instead. This will mean that any breach will fall on the scheme trustees/managers rather than the member. Prior to this change, a breach by a scheme would have resulted in an unauthorised payment on the member, which was not deemed to be fair.
The final two bullet points will also apply to:
- Dependant’s pensions bought alongside a member’s pension after 5 April 2015 or where a dependant’s pension is set-up on or after that date following the death of a member.
- Funds used to buy a short-term annuity after 5 April 2015. A short-term annuity is an annuity for no more than 5 years that can be bought from drawdown funds. From 6 April 2015, this could be from funds held in capped drawdown or flexi-access drawdown. Aegon don’t currently offer short-term annuities.
The flexibility options don’t apply to lifetime annuities set-up before 6 April 2015, including any dependant’s pension coming into payment after 5 April 2015 where it was bought alongside a member’s pension before 6 April 2015. The changes don’t apply to any scheme pensions set-up from defined benefit or defined contribution schemes either.
HM Revenue & Customs (HMRC) guidance covers where the amount of a lifetime annuity or scheme pension can be reduced after it is set-up. If there is provision in the terms of a lifetime annuity contract for a decrease type that isn’t covered in this guidance, then any payment of annuity or pension income will trigger the £10,000 money purchase annual allowance rules. This applies even if the decrease option isn’t taken up on – the important point is that the terms of the contract allow for a decrease option not covered in the HMRC guidance.
It follows that if the terms of the contract only allow for decreases that are covered in the HMRC guidance and if a member only takes their benefits in the form of a lifetime annuity or scheme pension, they will not be restricted by the £10,000 money purchase annual allowance rules. If you want to find out more about the MPAA rules, please read the article here.
These annuity changes could bring different product options and designs for lifetime annuities. However, in practice, not all schemes or providers will offer the flexibility options in their products. It will therefore be interesting to see how the market for annuities develops in light of the other significant changes introduced for taking benefits from uncrystallised and drawdown funds.
Pensions Technical Services