What is an annuity?

seven-day-weekend

This might seem a stupid question.

What is an annuity defined as?

This particular one was paid for by AVCs linked to an Occupational Pension Scheme. (Not worth it, imho).

Is it an occupational pension? A personal pension? Or something else?

Just curious as it doesn't seem to fit into any of the boxes!

Thanks!

EdInvestor

An annuity is a product you buy with an an accumulated pension ( or other) fund.It pays out a guaranteed income for life.

The insurance company takes your capital, invests it (mainly in bonds) and then pays you an income consisting of part interest and part capital. After about 20 years the capital will normally run out, and the insurance company then has to pay you out of the profits it has made,assuming you are still alive.

Annuities are supposed to operate on a "pool system" where the money the insurer collects from those who die young goes to pay the annuities of those who live to a great age.However after 20 years,inflation will have halved the value of the payout, so annuities are quite profitable for insurers.

There are various kinds - level (flat rate for your whole life - gets eaten away by inflation), index linked (very poor amount to start with), impaired life ( higher income, because you are likely to die young, immediate needs (used to cap the cost of people going into long term care)

There are also voluntary (purchase life) annuities, which you buy with a sum of money not from a pension fund.This type gets better tax treatment as you are not taxed on the part of the income which represents your original capital being returned to you. Immediate needs annuities aren't taxed at all if the money is paid direct to a care home.

Ordinary annuities are regarded by many as poor value these days as the rate is not much different from bank interest and you lose your capital.

seven-day-weekend

Thank you. This particular one pays out £49 a month which has been taken at flat rate as the person will need the money more in the early years.

If they had to tick a box on a form, should it go as Occupational Pension, Personal Pension, or Something else? It has been paid for with AVCs linked to an occupational pension.

Thanks again.

EdInvestor

Hard to say. Suggest you ask the IFA or annuity provider.I trust the person is shopping around for the best annuity rate, there can be quite a big variation, as much as 20% sometimes, never go with the AVC provider without checking.

See below for an idea. https://www.h-l.co.uk also has an annuity supermarket which will check for the best rate.You won't lose out by using an intermediary - the provider will charge you the commission anyway.

https://www.fsa.gov.uk/tables

seven-day-weekend

The person has been in receipt of this annuity for over two years, they just need to know what box to tick!

I'll tell them to ask the provider or put 'other'. Thanks!

EdInvestor

It's a personal pension type product but linked to an occupational pension. So it could be either.

Just to confuse the issue ( especially if it's a tax form) there is currently a new arrangement going through affecting things called "Retirement Annuity Contracts" which are a product which preceded personal pensions ( which were only invented in the late 1980s).

All sorts of oldies are likely to be getting into conniptions about this RAC thing as some of them will have paid too much tax and others will not have paid enough. :eek:

There seems to be no end to the hassle related to pensions :rolleyes:

Debt_Free_Chick

seven-day-weekend wrote:

If they had to tick a box on a form, should it go as Occupational Pension, Personal Pension, or Something else? It has been paid for with AVCs linked to an occupational pension.

Thanks again.

It's treated as an occupational pension as it's governed by the same tax rules that apply to occupational pension schemes. I'd put "Occupational Pension - AVCs".