Pension Annuities

Key Features

Its aims

• To provide an income which is payable for life.
• To allow you to provide benefits for your spouse or dependant if you die after your pension has started.

The following aim only applies to a with-profits pension annuity:

• To give you the opportunity to benefit from an income which could be greater overall than that available from a non-profit annuity.

Your commitment

• You choose which pension benefits you want, subject to the rules of the pension scheme from which the fund originates.
• You can purchase a pension annuity with Legal and General with the proceeds of your pension fund, the exercise of an open market option or a single contribution paid by you or your employer.
• You will not be able to go to another company for an annuity with the same funds once the annuity has been bought with Legal & General.
• Once you have chosen your pension options and your pension income has started, you cannot change your mind. However, if you choose a with-profits pension annuity there are choices available within that option. Please see the section entitled ‘How does a with-profits pension annuity work?’
• Once your income has started, your pension annuity cannot normally be surrendered other than following, for example, a court order requiring pension sharing in association with divorce.

Risk factors

• Your circumstances might change after you take your benefits, for example if you get married after you buy your annuity, you cannot add a spouse’s pension option.
• You may not have made adequate provision for your spouse or dependant when you die.
• The total payments which we make could amount to less than the sum used to purchase the annuity.
• If you have not made arrangements for your income to increase enough during payment, inflation would reduce what you can buy with your pension income.
• The pension annuity you can buy with your fund at any one time increases with age. It also goes up and down according to investment market conditions at the time you purchase the pension annuity. You could find you would have done better (or worse) by waiting for a change in investment market conditions.
• If on your death your dependant is no longer financially dependent on you because of a change in circumstances then no dependant’s income will be paid.
• If your pension fund is currently invested in a contract where investment conditions can change, the value of your fund could change before your pension annuity is actually bought, and this would affect the amount of income you receive.
• State Pension Credit is available to supplement the income of those aged 60 or over and guarantees a certain level of income, taking into account any other income and savings you may have. Taking your retirement benefits may affect your entitlement to the State Pension Credit. Your retirement benefits currently have to be taken no later than your 75th birthday. For further information on Pension Credit you can obtain a leaflet from the Pension Service or obtain information from www.thepensionservice.gov.uk
• The law and tax rates may change in the future.

The following aim only applies to a with-profits pension annuity:

• The income you receive from a with-profits pension annuity will vary each year, depending on the Anticipated Bonus Rate you have selected and any bonuses declared by Legal & General. This means your annual income could go up or down from year to year. You must consider whether you can afford to take the risk that your income may go down, especially if you will rely on that income to maintain your standard of living.
• Bonuses depend upon the experience of the underlying fund and in particular the investment return earned, mortality and expenses. For example, higher investment returns or mortality and lower expenses can lead to higher bonus rates, whereas lower investment returns or mortality and higher expenses can lead to lower bonus rates.
• The higher the Anticipated Bonus Rate you select, the greater the risk that the amount of income you receive from your with-profits annuity will fall in the future.
• The benefits provided by a with-profits pension annuity may be higher or lower than the benefits of a non-profit pension annuity, and that relationship can change from year to year.
• Any investment in a with-profits pension annuity will share in the risks of other with-profits pension annuities which can reduce your bonuses and therefore the amount we pay you. You also share in the risks of other with-profits policies such as bonds.
• We write with-profits and non profit policies in our Long Term Fund. We provide guarantees for both with-profits and non profit policies and the assets in the whole fund are ultimately available to meet them. This means that although you may benefit from support from assets backing non profit business, we could reduce the amount we pay you if we have to use the assets backing withprofits business to support non profit business.
• Past performance is not an indicator of future performance.
• If you decide to change your Anticipated Bonus Rate after your annuity has been set up, you might be worse off than if you had chosen that level of Anticipated Bonus Rate from outset.
• Please read the "Introduction to With-Profits" brochure (referred to in the "With-Profits" part of the "Further Information" section) in conjunction with this Key Features document. It will give you more detail on the technical terms we have referred to above.

Your questions answered

How does a pension annuity work?

When you decide to take your benefits you use your pension fund, or any personal pension contribution you or your employer have made for immediate retirement, to buy a pension annuity which will provide you with an income for life. If you buy a pension annuity before the date you originally selected when you started your pension, your pension income might be smaller than you expected as your pension will have had less time to grow, and the pension will be paid for longer. You can buy a Legal & General annuity if you are under 75 years of age at the commencement date of the annuity.

The amount of income you will receive depends not just on the size of your pension fund and investment market conditions at the time you buy your pension annuity but also on your age, sex and the options that you choose.

You can use the whole of your fund to buy an annuity. Normally there is an option, when you take your benefits, to take part of your pension fund as a tax-free cash sum. If you take a tax free cash sum, the remainder of the pension fund is then used to buy a pension annuity.

There are no restrictions on the value of the total benefits payable from all your Registered Pension Schemes. However, anything over a certain limit, called the Lifetime Allowance, will be subject to a tax charge of up to 55% on the excess. For the 2006/2007 tax year, the Standard Lifetime Allowance has been set at £1.5 million, rising to £1.8 million for the tax year 2010/2011 and will be reviewed on an ongoing basis after that.

For most people, the Lifetime Allowance will be the Standard Lifetime Allowance. However, you may be entitled to an increased Personal Lifetime Allowance in certain circumstances. For more information please speak to a financial adviser.

Please note that Legal & General will not accept any funds into an immediate vesting Personal Pension or Buy Out Plan which are in excess of the Lifetime Allowance. In the case of an open market option, we will accept benefits in excess of the Lifetime Allowance provided that the charge has been calculated and paid by the scheme. If you are unsure how much of your Lifetime Allowance you have used up or whether you are liable for a tax charge, please consult your financial adviser.

An immediate vesting transfer will be administered on the basis that it is not part of a block transfer. Please refer to HM Revenue & Customs (HMRC) Registered Pension Schemes manual for further information on block transfers.

A copy of the terms and conditions of the plan is enclosed. If you have not received a copy please contact your financial adviser.

How much pension will I be paid?

Inside this Key Features document you will find an illustration showing how much income you might expect to receive. The actual amount of income will vary according to the options you choose. The illustration assumes that your benefits do not exceed your Lifetime Allowance, or that any Lifetime Allowance charge has been deducted and paid by the ceding scheme. If this is not the case, Legal & General will not accept your application.

Once your annuity has been set up, you will be notified of the percentage of the Lifetime Allowance you have used up by taking these benefits, either by your scheme administrator or by Legal & General.

What are my annuity options?

There are a number of options available to choose from; the main choices are listed below. These may be restricted by the rules of the scheme that your pension fund came from.

1. A level income that is fixed for the rest of your life.
2. A smaller income at outset that increases each year at a fixed rate, for example 3% a year.
3. A smaller income at outset and link your pension to the cost of living via the Retail Prices Index (RPI), which may or may not increase each year. You may choose to have the increase capped at 5%, referred to as Limited Price Indexation (LPI).
4. A smaller income at outset in exchange for an income which would be paid to your spouse or dependant if you die first.
5. A guarantee that the income will be paid for an agreed number of years even if you die during the guarantee period.
6. To choose how frequently and when your income payments are made – monthly, quarterly, half yearly or yearly, in advance or in arrears.
7. To choose a non-profit and/or, if allowable, a with-profits annuity. By choosing a non-profit annuity the amount of your future income is guaranteed.

A with-profits annuity provides an income that enables you to share in the long-term growth potential of a ‘with-profits’ investment during your retirement. If you choose a with-profits annuity your income will change each year depending on any bonuses declared by Legal & General and the Anticipated Bonus Rate you have selected. See ‘How does a with-profits annuity work?’

Please note, a with-profits annuity is only available if your fund does not include any benefits arising from contracting-out of the earnings related part of the State Pension Scheme, or benefits that require a predetermined level of increases during payment.

How do I make a personal pension contribution for immediate retirement?

You can make a lump sum contribution into Legal & General Personal Pension Scheme No.1. You pay your personal contribution net of basic rate tax relief (which for tax year 2005/2006 is 22%). We then automatically reclaim basic rate tax relief from HM Revenue & Customs and we invest the total of your contribution and the tax relief; this is called the ‘gross’ payment. If you pay higher rate tax you should claim the extra relief through your tax office. The value of tax relief will depend on your individual circumstances. For details on how much you can contribute and qualify for tax relief, please contact your financial adviser.

Your personal (net) contribution payable to Legal & General must come from your personal bank account and should accompany the completed application form and any relevant certificates to the address on the application form.

We can also accept employer’s contributions for immediate retirement into this contract, payable by cheque to Legal & General.

The enclosed illustration shows the gross contribution chosen together with the pension annuity options selected.

How long do I have to make my decision?

The rate used in the enclosed illustration is guaranteed for 18 days from the date of the illustration. If you would like to proceed with the annuity on this basis please complete the enclosed application form.

What happens if the investment market conditions have changed in the meantime?

If your guaranteed rate period has expired and investment conditions have changed, Legal & General will inform you through your financial adviser if there is a change in the pension annuity illustrated and the revised pension that will be set up.

What should I do if I want to see other illustrations?

You can ask Legal & General to provide other illustrations if you are interested in any other options that have been outlined. Alternatively, you may approach any other life insurance company, either through an independent financial adviser or directly, and ask them for an illustration. Our advisers can only give advice on Legal & General products.

How are any benefits from contracting-out treated?

If your pension fund includes benefits arising from contracting-out of the Earnings Related part of the State Pension Scheme, your benefit will contain either Guaranteed Minimum Pension (GMP), Protected Rights benefits or S9(2B) Rights. Certain restrictions apply to the way these benefits are paid. For example, you may have to provide a pension for your spouse if you die first. If you have Protected Rights benefits, the annuity rate used to convert your fund into an income must be the same regardless of your sex. If you have GMP benefits, your income may have to increase by a set percentage each year. If these restrictions apply they will be shown on your personal illustration.

Do I pay tax on my income?

Yes, the income will be taxed as employment income according to instructions we have received from your local tax office under the Pay As You Earn (PAYE) system. Current tax rates and allowances could change in the future. If you have chosen a spouse’s or dependant’s pension option, any income paid to them will also be subject to tax.

What are the charges for?

Not all of your fund will be used to provide a pension and/or tax-free cash sum. Some of it will go to meet our expenses for administration, investment management, and any commission that we pay to your financial adviser. The expenses used in the accompanying quotation are based on our current experience. The charges to meet these expenses for all non-profit annuities are fixed at outset and do not affect your future income payments. The expenses incurred for the with-profits annuity are considered at outset and reviewed each year thereafter. The level of expenses could change and will be reflected in future bonus declarations, which could affect the level of income you or your dependant receive each year.

How much will the advice cost?

Legal & General may pay commission to your financial adviser for arranging your plan. It will be paid for out of the charges. Commissions and other benefits depend on the size of the purchase money buying the annuity. Details of the commission payable are included in the enclosed illustration.

How does a with-profits pension annuity work?

A with-profits annuity provides lower guarantees than a non-profit annuity, but offers the prospect of future bonuses. These bonuses may increase your pension income above the level of a non-profit annuity. However, as future bonus rates are not guaranteed you may ultimately receive less under a with-profits annuity than you would have received under a non-profit annuity. As bonuses will vary from year to year, your income under a with-profits annuity may fall as well as rise, so you should consider whether you are prepared to take the risk that your income could fall. Bonuses will depend on investment performance, the expenses we have incurred and our mortality experience. The levels of future bonus rates are not guaranteed and they may even be zero. Bonuses are normally declared in February each year and, if applicable, are added to the policy on the next anniversary date following the declaration. Your money is invested in the with-profits section of Legal & General’s UK long term fund. This fund invests in a broad spread of assets including stocks and shares, fixed interest securities, UK property and cash.

The following terms are key to the operation of a with-profits annuity. It is important that you read and understand these terms.

There are two types of bonus that may be added to your policy:

Annual Bonus

This is the level of bonus we apply at the policy anniversary date which once added cannot be withdrawn. However your chosen Anticipated Bonus Rate (see below) may eat into the value of your future income payments.

Temporary Bonus

The level of your income payments, before any Temporary Bonus, will be determined by the Anticipated Bonus Rate and annual bonuses declared. To this payment, Temporary Bonus may be added, depending on, for example, the underlying investment and mortality experience to date. As the name implies, it is a temporary addition to the normal income payment. If a non-zero temporary bonus is declared, it will start at the next policy anniversary and it will only be payable for one year. It is important to understand that the Temporary Bonus rate can be changed or withdrawn at any time, is not guaranteed, could be zero, and any new rate will apply from the next policy anniversary. The Temporary Bonus is not included in the ongoing calculation of the effect of the Anticipated Bonus Rate at each anniversary.

Anticipated Bonus Rate (ABR)

A factor that determines the starting level of your pension is the Anticipated Bonus Rate (ABR). Basically, the ABR is a mechanism that allows you to exercise your own judgement as to the likely future level of bonus rates, and to use this to choose an ABR that will help you to achieve your desired pattern of income payments - level, increasing or decreasing. The ABR you choose will affect your starting level of income as follows:

• Choosing a low ABR means your starting level of income is lower but the potential for future income increases is greater. You also reduce the risk that your income may go down from year to year.
• Choosing a high ABR means that your starting level of income is higher but the potential for future income increases is reduced. There is therefore also a higher risk that your income may fall from year to year.

We highly recommend that you compare a number of different quotations with different levels of ABR before you make a decision. It is important to realise that, even if you choose a low ABR in anticipation of an increasing income payment, it does not guarantee this will happen as other factors will also influence the outcome.

Your pension income will only change on a policy anniversary date. An example of how the income from a with-profits annuity can change as a result of the bonuses declared is shown on the next page. The figures shown are based on ABRs of 0% and 4%.

Please note that the figures are only simplified examples to demonstrate how the declared bonuses are applied to a with-profits annuity and in particular how the bonuses affect policies with different ABRs. In the examples shown you can see how the income from the policy with a 0% ABR rises each year, but the income from the policy with a 4% ABR falls in year two. The figures that apply to your policy will almost certainly be different. Each year, a full statement with details relevant to your with-profits annuity will be issued shortly before your policy anniversary date.

Varying your ABR

After your policy has started you may be able to vary your selected ABR on any policy anniversary date, subject to certain conditions. Please note, after age 75 you cannot vary your ABR. You may wish to vary your ABR if your investment outlook changes and you believe that bonuses will not turn out to be at the level that you had first expected. If you wish to vary the ABR we will take account of investment market conditions and we may ask you to provide medical evidence which you must provide in order to proceed. Please note, we reserve the right to make a charge for any expenses which we incur as a result of any medical underwriting required. If you vary the ABR under your policy it may have a significant impact on the income payments you receive in subsequent years. Please note that varying your ABR in the future could leave you worse off than if you had selected that level of ABR at outset. You should seek financial advice before exercising this option.

What is the ‘guaranteed minimum’ annuity?

Though the with-profits annuity carries a risk that income may reduce, the policy has a guarantee to provide a minimum level of income below which the income cannot fall. The level of the guaranteed minimum annuity will be a percentage, depending on the ABR chosen, of the initial annuity payable.

It is important to note that the income under a with-profits annuity may fall if bonus rates do not match the ABR selected, from year to year. It is possible that the level of income could fall to as low as 40% of the initial amount if an ABR of between 3.1% and 4.0% (inclusive) is selected. This guaranteed minimum amount will not change after the pension has started unless the ABR is altered. If the ABR is changed, a new starting level of pension and revised guaranteed minimum annuity will be quoted at that time. The guaranteed minimum annuity will also apply proportionally to any spouse’s/dependant’s benefit payable under the policy. Please refer to the enclosed illustration for specific details of the level of your guaranteed minimum annuity.

Can I change to a non-profit pension annuity?

A with-profits pension annuity can be converted to a non-profit pension annuity, either on a fixed or increasing basis, in the event of divorce or dissolution of a registered civil partnership, or at any time after the first anniversary of your policy starting. After you die your spouse or dependant also has this option if an annuity under your policy is payable to them. Converting your policy will change the amount of income we pay, but the level of income will then be guaranteed. Once a with-profits pension annuity has been converted, the conversion cannot be reversed. It is not possible, at any time, to convert a non-profit pension annuity to a with-profits pension annuity. Terms for the conversion will take account of the investment market conditions at the time and we may ask you to provide medical evidence which you must provide in order to proceed. Please note, we reserve the right to make a charge for any expenses which we incur as a result which you must provide in order to proceed.