5 year rolling annuities
This is a relatively new product on the market which is an
alternative to Income Drawdown and available from a limited number of providers.
Tax-free cash is usually taken at inception and then over
a 5 year period a temporary annuity is purchased to provide income, which
can be the equivalent of a life time annuity or you may select an income between
50-100% of this figure.
Since temporary annuities (these are annuities which cease
without value at the end of a fixed term) are cheaper to purchase than lifetime
annuities, a surplus can be invested. The surplus is invested in a similar
manner to Drawdown i.e. in an area with the potential to produce high enough
growth rates to protect the pension fund.
Although this may be a flexible choice for some retirees
the plan is reasonably complex and carries a high degree of risk, in that
returns and its ultimate success will rely on investment performance over
the term of the plan.
There is also a risk of diminishing your fund if investment
performance is very poor. This is one of the riskiest options available and
you should be absolutely certain that this is compatible with your situation.
Advantages
- Flexible income in retirement.
- Retained investment control of residual funds.
- Timing of annuity purchase possible.
- Full tax-free cash available at inception without the obligation to buy
an annuity.
- Survival bonus available if you (and where a spouse's pension has been
selected, your spouse) survive until the end of a 5 year period.
Disadvantages
- Risk - the fund value will be linked to investment performance which could
be volatile and worse than expected.
- The contract is unable to receive protected rights.
- The lifetime annuity must eventually be bought from the same provider
- whose rates might not be the most competitive at the time.
- The lump sum death benefits are limited to the normal 5 year period during
the first 5 year term. Thereafter, only pension benefits are payable.
- The plan will cease without value upon the death of the single annuitant.
- The level of income after the first 5 years might go down if investment
performance has been poor.
