London & Colonial has introduced open annuity, which allows
annuitants to pass on their pension pot to their heirs when they die.
Conventional annuities pool the resources of annuitants and use the funds of those who die early to subsidise those who live longer than expected, but open annuity does not operate this mortality cross-subsidy. Instead, it separates annuitants' pension pots, allowing their relatives to benefit rather than the insurance company and other annuitants.
Conventional annuities invest in a high proportion of gilts, which are low-risk. However, the yield from gilts is low at present and this has a knock-on effect on annuity rates, so an annuitant's capital buys less income than it could have in previous years.
Open annuity aims to solve this problem by allowing annuitants to choose their investment funds as they would with a self-invested personal pension (Sipp). In this way, investment portfolios can be tailored towards an annuitant's attitude to risk. However, as annuitants' pension pots are separate, they are totally reliant on investment performance.
Income can be paid annually, monthly or on an ad-hoc basis which ensures flexibility. However, annuitants who vary the level of income they take must ensure they do not withdraw too much income as their capital will suffer.
London & Colonial will transfer annuitants to a conventional annuity if the value of the pension pot falls by 35 per cent but then annuitants' relatives would not be able to inherit the remaining money. Any annuitant who passes on their pension pot would also need to be aware of the potential inheritance tax burdens they would also transfer to their relatives.