Key Features of the Guaranteed Pension Annuity

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QUESTIONS AND ANSWERS

WHAT IS A PENSION ANNUITY?

WHAT IS A PRUDENTIAL GUARANTEED PENSION ANNUITY?

HOW DO I BUY A PRUDENTIAL GUARANTEED PENSION ANNUITY?

You can buy your annuity with money from any of the types of pensions shown below:

If you want to use money from more than one scheme, we will, if possible, combine the amounts.

COMPULSORY BENEFITS

We can also accept money from any of the types of pensions we have mentioned above that has been set aside for a ‘protected rights pension’ or a ‘guaranteed minimum pension’ as a result of contracting out of the State Earnings-Related Pension Scheme (SERPS) or the State Second Pension (S2P). If this applies to you, you may have less choice for your annuity because it is compulsory for the income bought with this money to meet conditions set by the Government.

WHAT IS THE MINIMUM INVESTMENT?

If you are buying your annuity with money from a Prudential pension scheme there is no minimum.

If you have a Prudential pension, as well as a pension saved with another provider, you can, if you wish combine these amounts before you buy an annuity.

There is no minimum on the amount you can transfer from another provider (scheme rules permitting).

If you have pension savings with another provider and none with Prudential, the minimum amount you can transfer from another provider is £10,000 (after you have taken any tax-free cash you may be entitled to).

HOW FLEXIBLE IS IT?

FLEXIBILITY WHEN YOU BUY

At the start you can choose:

FLEXIBILITY AFTER YOU HAVE BOUGHT

There is no flexibility once you have bought a Guaranteed Pension Annuity. So, before you buy it is very important to consider your possible future needs, as well as your present ones. Once your income starts you cannot:

WHAT WILL MY INCOME BE?

Your quotation shows how much income we will pay you, based on specific annuity options. If you want to compare the income from different options, please ask for more quotations.

YOUR INCOME IN THE FIRST YEAR

The amount of income you get will depend on a combination of things including:

YOUR INCOME IN FUTURE YEARS

The amount of money we pay you will stay the same unless you choose a rising income or an inflation-proofed income. Your choice will depend on your circumstances and how long you expect your retirement will last.

COMPULSORY BENEFITS

The choices and options you have with any compulsory benefits may be different from the ones described in this section, because they are limited by Government rules. Please see your quotation for details of any compulsory benefits you will receive from your Guaranteed Pension Annuity.

OPTION 1: LEVEL INCOME

This option will pay you the highest income at the start – but you won’t get any increases in the future. So your income will stay the same throughout your retirement.

Effect on your income: Although you’ll start off on a higher income its buying power will go down as the cost of living goes up. Even at low rates of inflation, such as 3% a year, the spending power of your income could be reduced by a quarter in just 11 years.

OPTION 2: FIXED YEARLY INCREASES

With this option, HM Revenue & Customs rules permitting, you may be able to choose for your income to go up each year by a fixed amount from 0.01% to 8.5%. Your chosen increase will start at each annuity anniversary date based on the amount of income you are receiving at that time. The fixed rate you choose will apply throughout your retirement.

Effect on your income: The higher the increase you choose, the lower your starting income will be when compared to Option 1. However, in future years the increases will help to protect the buying-power of your money.

You could end up with a higher income than Option 1, depending on how long you live, but this cannot be guaranteed. The reduction in your starting pension needed in order to provide yearly increases depends on your age, sex and chosen rate of increase.

OPTION 3: INFLATION-PROOFED INCOME

This option currently links your income to the Retail Prices Index (RPI), a measure of inflation in the UK. The Government is considering using another index to measure UK inflation, called the "Consumer Prices Index". Our understanding is that the Government intend to continue using the RPI for pension matters, but they may decide to change in future.

If you choose inflation-proofing your income will be fixed for the first year and then it will change each year in line with the rate of inflation.

If inflation falls below zero and becomes a negative amount, your income will go down by the same amount. But for an extra cost at the start, we can provide a ‘negative inflation’ guarantee. This means that your income would not fall if inflation falls below zero.

The yearly changes in your income will start at each annuity anniversary date. The new amount will be based on the change in RPI over the 12 month period ending 3 months before the anniversary. For example, if your annuity anniversary is in June, your increase will be based on the yearly RPI figure for March.

Effect on your income:With this option your starting income will be lower than option 1 and be similar to option 2 if you choose a fixed yearly increase of 3%. However, your future income will always be fully protected against inflation (no matter how high it goes). Adding the guarantee against negative inflation will reduce your starting income.

Income increases required by the government If you have pension savings in either a company pension scheme or protected rights scheme that you saved after 6 April 1997, these used to have to increase in line with the rate of inflation, limited to a maximum increase of 5% a year (called Limited Price Indexation or LPI).

From 6 April 2005:

5% for income earned between 6 April 1997 and 5 April 2005; and

2.5% for income earned after 6 April 2005.

The rate of increase is updated in the Occupational Pensions (Revaluation) order each year.

There are also minimum increase requirements for any guaranteed minimum pension earned since 6 April 1988, as a result of contracting out under a ‘final salary’ or ‘defined benefits’ company scheme. If this applies to you full details will be provided in the compulsory benefits section of your quotation.

Your pension scheme Trustees or Administrators may decide to pay you more than the minimum increase. Please contact them if you would like more information about what rate of increase will apply to your income.

WHAT IS THE JOINT-LIFE OPTION?

We use the name ‘joint-life’ to describe an annuity that will pay you an income until you die and then, an income to your dependant. We will not pay an income to your dependant before your death.

If you have a spouse, civil partner or other person who depends on you for financial support, choosing this option means they’ll get an income from your Guaranteed Pension Annuity, after you die – provided they survive you. If you want this option you must choose it at the start, as you cannot add it later on.

We will pay any joint-life annuity for the rest of the life of the dependant except where:

Your quotation will reflect any of the special provisions that apply to the joint-life annuity.

When you apply for your Guaranteed Pension Annuity, you decide (HMRC rules permitting) how much income your dependant should get, for example, it could be the same as you, or a lower amount, say a half or two-thirds. Their income will be based on the chosen proportion of the amount you are receiving when you die.

Effect on your income: A joint-life annuity will normally pay you a lower income than a singlelife annuity. The more income you provide for your dependant, the lower your own income will be as a result.

WHAT IS THE PAYMENT GUARANTEE OPTION?

This is another way of providing an income for your dependants after you die. You may be able to choose any guarantee period from 1 to 10 years, depending on the rules of your pension scheme. If you die before your guarantee period ends, we will continue to pay an income until the end of it. The income would then stop unless you have chosen the joint-life option as well as the payment guarantee options. For example, if you have a 10 year guarantee, and you die after 6 years we would continue to pay an income for another 4 years. If you choose a joint-life annuity this guarantee option may not be so important to you, because we will automatically pay an income to your dependant after you die – provided they survive you. If you are buying your annuity with money saved in an occupational pension scheme, the choice over the length of guarantee period will depend on the pension scheme rules and may be limited by your scheme Trustees. In addition, the payment of any guarantee benefits will be made at the Trustees’ discretion. If you are buying your annuity with money saved in a personal pension you can choose any guarantee period you want, up to the current maximum of 10 years. Payment will normally be made to your husband, wife, civil partner, your estate, or someone named in your will. Effect on your income: The cost of this guarantee reduces your income. The amount it is reduced by depends on your age, sex and the guarantee period you choose.

CAN I GET A SPECIAL DEAL IF I’M IN POOR HEALTH?

You could qualify for a higher than normal income from an ‘enhanced’ Guaranteed Pension Annuity if:

If you buy a joint-life annuity we can take your partner’s health into account, even if your health is fine.

If you think you are eligible please tell us. We will then ask you to complete our medical questionnaire so that we can decide if you qualify for an enhanced income. In some cases we may ask your doctor to send us a medical report. If you are diagnosed with a serious illness after your annuity has started, we will not be able to enhance your income. Effect on your income: If you do qualify for an enhanced income you could get an additional 5% to 10% a year, maybe more depending on the severity of your medical condition. If you would like an illustration for an enhanced Guaranteed Pension Annuity, please ask us or your financial adviser if you have one.

WHAT CHOICES WILL I HAVE ABOUT HOW I GET MY INCOME?

At the start you choose how often you want us to pay you – this could be monthly, quarterly, half-yearly or once a year. You can also choose when to have the money paid:

We will pay your income straight into your bank or building society account. The account must be in your name (either your own account or a joint account).

Effect on your income: Choosing ‘yearly in arrears with no final payment on death’ will pay you the highest income.

WHAT HAPPENS TO MY INCOME WHEN I DIE?

Adult dependant: If your dependant survives you, we will pay them an income for the rest of their life. This will either start when you die, or at the end of the payment guaranteed period if you have chosen one.

Child dependant: Subject to scheme rules, we will normally pay your dependant an income only for a limited time – until they reach age 23.

If you have a joint-life annuity plus a payment guarantee option

Your dependant’s joint-life income will normally start when the income from the payment guarantee stops (so there is no overlap). However, when you apply for your annuity you can ask for the two incomes to be paid at the same time if you wish. This is known as 'overlap' (this decision may be subject to your scheme rules).

COMPULSORY BENEFITS

What happens to any compulsory benefits when you die may be different from the situations described above. Please see your quotation for details.

WHAT ARE THE CHARGES?

We will take a charge for all of the costs and expenses when we set the level of income that you will receive from your annuity.

WHAT ABOUT TAX?

The income that you receive from your Guaranteed Pension Annuity is taxed as earned income through the PAYE system. Tax will be deducted under PAYE using the tax code which will be provided by HM Revenue & Customs.

THE LIFETIME ALLOWANCE

On the 6th April 2006 the government introduced a new overall ‘Lifetime Allowance’ for all types of pensions regardless of how many you have. For the first year after 6 April 2006, this overall ‘Lifetime Allowance’ was set at £1.5million, increasing for each of the following 4 years as follows:

That means if the total value of your pension fund(s) exceeds the Lifetime Allowance, there will be a special tax charge.

Those who before 6 April 2006 had pension savings which are likely to be more than the Lifetime Allowance by the time they retire, or who are already over this limit, can apply for a higher personal Lifetime Allowance to minimise any special tax charges. If your current normal retirement age is earlier than 50, there are special rules which mean your Lifetime Allowance may be reduced.

CAN I CHANGE MY MIND?

Your statutory right to cancel is 30 days, which begins from the date your first quotation is issued. Additional quotations do not start the cancellation period again. If you wish to exercise your right to cancel, you should complete and return the Cancellation Notice you will receive upon acceptance, or write to us at the following address: Prudential Annuities Department Stirling FK9 4UE.

WILL I LOSE ANYTHING IF I CANCEL WITHIN 30 DAYS?

If the value of your investment amount falls after your Guaranteed Pension Annuity starts we reserve the right to refund the value of your investment amount as at the date we receive your cancellation instructions. As a result you may get back less than you paid in. If we have already paid any money to you, you must repay it before we can make the refund to your pension scheme. After the 30 days are up, you have no right to cancel.