What is a Compulsory Purchase Annuity?

14th February 2012

When it comes to retirement age the first consideration for many people is how to invest their money wisely so that they will have a secure income for the rest of their lives. Up until recently the Government required that everyone who  held a private pension scheme, must invest this pension pot in an annuity by the age of 75, this was designed to ensure that they had a stable income for the remainder of their life and this was the backbone to the compulsory annuity scheme.

Compulsory Purchase Annuities still allow for annuitants to take out a lump sum before they invest their annuity and this can be up to 25% of their pension pot. It should be noted that since the middle of 2010 this scheme has started to be phased out by the Government.

How does this compare to Voluntary Annuities?

For people who did not fall under this scheme there were still annuity options available to them but these came as voluntary annuities and they were a little different in the way that they worked. Voluntary annuities are in general not bought with pension money but rather paid for with savings or a lump sum (in some situations the 25% lump sum taken from the pension pot.)

In general these can be seen as an alternative to investing with traditional methods such as putting the money in the bank, annuities can provide a stable income and often don’t attract the high tax rates that they would from a bank account. The only downside to this type of investment is that you are not left with the lump sum still in the bank account after you die, meaning that if you were to die unexpectedly your money would usually be returned to the annuity company.

Recent changes to the Compulsory Purchase Annuity Scheme

Up until a few years ago this scheme was compulsory to anyone who had a private pension fund but in more recent years   the Government has relaxed this ruling to give retirees better control and flexibility over where they would like to invest their retirement income.

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