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Q&A » Pensions
Assuming I am correct in the assumption that the monthly payment from my annuity provider comes from the interest made on the lump sum invested; what happens to the lump sum when I quite this mortal coil? The same goes for the company pension which I contributed in to for 30 years.
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0You are incorrect in your assumption.
The annuity is paid using a combination of capital and interest payments. The insurer who sells it uses assumptions about the average expected lifetime, interest rates, inflation etc to decide how much it can commit to paying out based on the capital you put in.
Of course - you are incredibly unlikely to die at the average expected life time, so almost all annuities either make a profit or a loss for the insurance company, but by selling large numbers (and being prudent in their assumptions) the company can ensure they stay solvent and the profits out weigh the losses.
Posted on 30 September 2012 |
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881Occam's comment is correct as far as your private pension is concerned.
If your company pension is money purchase (defined contribution) then iy would also be true for that pension.
If your company pension is final salary (defined benefit) then the trustees might buy it out with an assurance company, in which it would also be on the same basis as your private pension, or they could take the risk themselves, in which case the fund would gain if you died earlier than expected, or make a loss if you die later than expected.
The only occasions when the heirs might gain is when income drawdown is taken.
Mike
Posted on 30 September 2012 | Love 0 loves
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0 881As soon as you have bought an annuity, or the trustees have, the capital gets swept up into the assurance companies funds, so it no longer has any relevance to you. Your only relevant item is the pension that has been bought.
Your income is guaranteed for life and the assurance company makes a profit or loss depending on whether you survive beyond the predicted date.
There is no capital fund solely related to your pension. The assurance company have one big pool of money for all their pensions and they will make a profit on some and a loss on others.
Mike
Posted on 02 October 2012 | Love 0 loves
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