Conventional Annuity

What is it?

A policy purchased from an Insurance Company or Mutual, which guarantees to pay an agreed level of income until the death of the insured life/lives.

Who is it for?

This option may be applicable where an individual wishes to relinquish investment control of their pension fund in exchange for security or income.

How does it work?

This type of annuity allows the individual to decide how to receive the pension income.  Once agreed, the pension income will remain at the level selected (assuming an escalation has not been chosen).  A tax-free cash sum can be taken but only at outset.  There are numerous combinations, which can be selected, but the inclusion of these benefits affect the initial pension that can be bought by the pension fund.  These include:

• Whether the pension is to be based on a single life basis or part of it to continue for the benefit of a spouse
• Whether the pension is to remain level or increase during payment
• Whether the pension is to be paid for at least a minimum term of years even in the event of early death

The accumulated pension funds less any tax free cash are spent with the purchase of an annuity.  The income provided depends on annuity rates and selected options at the time of purchase.  These rates are based on interest rates and longevity.  Purchase of an annuity is a once in a lifetime choice – once purchased control of the pension fund is lost.  The pension is guaranteed to be paid for life according to the selected basis.  Benefits once selected cannot be changed.

It may be possible for those with impaired health or who smoke  to obtain better annuity rates

What is the tax position?

Any pension income paid through the annuity will be treated as earned income and therefore subject to income tax at the individual’s marginal tax rate.