Buying an 'Annuity'

As you approach retirement age, many of you will be given the option to buy an Annuity (pension) from the company that have been managing your money. This option is referred to as an 'Open Market Option' and this basically means that you can move your retirement fund to the company that will offer you the best annuity rate available in the open market.

This type of Annuity is also referred to as a 'Compulsory Purchase Annuity', where the money being used to purchase the annuity/pension is coming from a pension fund. An 'Immediate Annuity' refers to where the money is coming from your own resources.

The standard quote that is issued with your retirement papers will normally be based on a 'Single Life Pension', with no indexation, with a guaranteed minimum payment term of 5 years.

There are, however, many more options that should be considered and the following is a brief description of what these mean.

Guaranteed Period - You can choose a guaranteed period of between 0 and 10 years. If, for instance, you choose 5 years then the annuity/pension would be paid for a minimum of 5 years, or for your lifetime. If the person receiving the annuity died after year 2, the annuity would be paid for another 3 years after death. A longer guaranteed period may be a consideration where the person might be in ill health.

Escalation - You have the option of increasing the level of annuity/pension you will receive in future years. You might exercise this option if you wanted your pension to try and keep pace with inflation. It is possible to have the increases on a simple or compounded basis. It can also be included for a first and second life.

Single(First) or Joint (Second) Life - You can elect to have the annuity/pension payable to just one person or you can arrange for it to be paid to your spouse, following you death.

Reversion Rate - This refers to the percentage of the annuity/pension that the second life would receive in the event of the death of the first life. For example, this could be 50% or 66.67% of the first life annuity/pension.

With Overlap - If the first life died within the guaranteed period and there was a second life annuity/pension to be paid, the second life would receive the pension of the first life (up to the end of the guaranteed period) plus their own annuity would also be paid (in the guaranteed period) and for life thereafter . The two pensions would 'overlap'.

Without Overlap - If the first life died within the guaranteed period and there was a second life annuity/pension to be paid, the second life would receive the pension of the first life (up to the end of the guaranteed period). After this date the agreed second life annuity/pension would become payable.

Frequency - The annuity/pension can be paid monthly, quarterly, half-yearly or annually.

Payment In Advance/Arrears - Payment in advance refers to where the annuity/pension becomes payable on the commencement date of the policy. In arrears, refers to deferring the payment to a future date within the first 12 months.

Impaired Life Annuity - Some companies may offer a higher annuity/pension rate if the person is in bad health. The rate agreed would be subject to the company receiving some medical evidence.


With the exception of the Impaired Life Annuity, all of the options cost money and have the effect of reducing the amount of annuity/pension that would be payable.

I hope that these brief descriptions are relatively easy to follow. If not, you can post here and I will do my best to elaborate on them.