Open Annuity FAQs
Regulation and Compliance
Why is the annuity underwritten by a Gibraltar Insurer?
The original intention was to form a UK-based insurer; but UK law does not yet confirm that Insurers can operate 'segregated cells', the essential mechanism that allows individual, non-pooled annuities. It is the non-pooling of the annuity that allows the operation of the open annuity. Gibraltar has for some time recognised the contractual effect of segregated cells and has recently introduced dedicated legislation in relation to segregated cells. Once in force, Gibraltar is the only EU jurisdiction which allows for the statutory provision of segregated cells.
Why does the Insurer need to be in the European Union?
The Inland Revenue rules require an annuity to be bought from an EU insurer; Gibraltar is regarded as an EU jurisdiction.
What regulatory compliance does Gibraltar have?
Gibraltar has adopted broadly UK regulations; the Financial Services Commission (the equivalent of the Financial Services Authority). The Commission is an independent statutory body corporate established by the Financial Services Commission Ordinance 1989. The Commissioner is appointed by the Governor, acting with approval of the UK's Foreign and Commonwealth Secretary. London and Colonial is approved under Gibraltar law.
Who owns London & Colonial?
The owner is Open Annuities Ltd., which is based in the UK. The Insurer is established as a single purpose insurance company under EU law, with the minimum equity base of 800,000 units of account.
Who is behind the open annuity?
The open annuity was designed by a team lead by Robin Ellison, the National Head of Pensions at Pinsents the law firm, and author of 'Pensions Law and Practice', the standard four-volume loose-leaf legal textbook.
Who are the advisers and bankers?
- L&C bankers are s G Hambros Bank & Trust (Gibraltar) Limited
- L&C auditors are Baker Tilly (Gibraltar) Limited
- L&C legal product advisers are Pinsent Masons
- L&C actuaries are Watson Wyatt
- L&C segregated cell advisers are Ernst & Young UK
- L&C UK annuity administrators are LC Pensions Ltd.
- L&C domestic administrators are Caledonian Insurance Management Services Ltd.
- L&C Gibraltar Legal Advisors are Hassans
Can I get an open annuity direct?
No; the open annuity, because of the risks, is only available through appropriately authorised independent financial advisers or licensed insurance companies.
Product specification
What is an open annuity?
The open annuity is approved by the UK Inland Revenue. It allows individuals to buy an annuity from an approved EU insurer, with some material advantages over a conventional annuity, including:
- the right for the estate to recover any excess funds on death (where a share in the Insurer is purchased)
- the charging of open fees, rather than hidden charges
- the application of a single life span, rather than cross-subsidy with other lives
- the ability to invest funds as the Investor thinks fit and to re-arrange the funds accordingly, using the policyholders own investment adviser if appropriate, and with funds held in the UK
What happens on death?
If you have chosen a survivor's pension, there will be a second pension. On the death of the survivor (or the policyholder if there is no survivor) any balance of assets in the annuity account is declared to the insurance company as a profit. If you have bought a share in the insurance company, your estate may redeem the share, in exchange for the 'profit' (ie. the amount remaining in the account.)
How much annuity does the policyholder get?
The level of the annuity depends on the value of the funds in the account. You will receive a quotation of the maximum and minimum you can draw each year. Of course the value of the funds can fall as well as rise. At the end of each three-year period (or more frequently if requested or insisted upon by the insurance company) the fund is revalued and the annuity recalculated on the basis of the age of the policyholder and the value of the funds, using figures published in the market.
Open annuities in practice
How does it work?
It works just like any other annuity; you pay (or your pension fund pays) a lump sum to an insurance company, in exchange for which you get periodical payments until your death (or, if you so choose, the death of your spouse, if later).
But unlike most other annuities:
- The periodical payments are not fixed; they vary depending on the varying value of the lump sum you paid
- You decide where the annuity money is invested
- You pay annual fees, not hidden overheads
- Your estate can recapture any profit the insurance company would normally make on your death
Who operates the open annuity in the UK?
LC Pensions are expert in the management of the administration of annuities and self-invested personal pensions. It operates the administration office of the insurance company in the UK, where all open annuity administration is carried out. Trade visitors (insurance companies and IFAs) are welcome to visit by appointment and see our operations.
How often does the policyholder get a valuation?
There is an annual valuation as of right; more frequent valuations are available (not more than once daily) on a fee basis of £10 per valuation.
What happens if I cannot decide how to invest my money?
A manager of your choice will decide for you.
You indicate your choice of manager in the application form. At any time you may switch investments to any UK Inland Revenue approved investment; these include most collective investments including unit trusts, OEIC's, UCITS and investment trusts. London and Colonial does not itself give investment advice or offer any fund management of its own.
What about tax?
Our understanding of the tax position is in relation to annuity payments PAYE is deducted and remitted to the UK Inland Revenue.
On death, if the policyholder holds a share in the insurance company, the share may be redeemed and the proceeds pass under the terms of the policyholder's will subject to Inheritance Tax where appropriate.
L&C offers its current interpretation of the tax position as a courtesy, but offers no warranty on tax, and annuityholders must rely on their own advice at all times. The tax position is also subject to change by the authorities.
Who can buy this annuity?
Any self-invested personal pension account (SIPP), any small self-administered pension scheme or any other individual with approved pension rights may use the open annuity. People who have already bought an annuity may not purchase an open annuity in its place.
Can I change out of an open annuity?
Policyholders can switch to a conventional annuity basis at any time; there is no power to switch back.
Are there any drawbacks to the open annuity?
Yes.
- The open annuity is not appropriate for policyholders who require certainty and continuity of income. Open annuities are open to the risk of falling underlying values, since they may be invested in a variety of investments other than government bonds. In addition, the annuity payments are not guaranteed by the insurer, since they depend on investment decisions made by the policyholder or his advisers.
- The investment opportunities are more restricted than those offered under drawdown arrangements.
- You do not benefit from the early death of other annuitants in the insurance company pool.
- If the value of the underlying assets falls to the extent that the minimum annual income would be below 35% of the original minimum income, the annuity must be converted to a conventional basis immediately.
To find out more about how you or your high net worth clients could benefit from our range of individually tailored products, call us on 0870 7566696.