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8 Deferred annuity including personal pensions 8.1 Definition Deferred annuities can be used when there is time between the date of purchase and the date when the income stream is required to start. The contract can thus be paid for either by a single or regular premium during the deferred period. The usual structure for these contracts is that the policyholder pays regular premiums for a period up to the specified vesting date. These premiums buy amounts of regular income, payable to the policyholder from the vesting date. A single premium at the start of the contract is a possible alternative to regular premiums. 8.2 Use to meet customers needs The contract enables individuals to build up a pension that becomes payable on retirement from gainful employment. At the vesting date of the annuity, an alternative lump sum may be offered in lieu of part or all of the pension, thereby meeting any need for a cash sum at that point, for example to pay off a house purchase loan. This is commonly referred to as a cash option. In practice, the same aims can be achieved, in potentially a more flexible way, by combining an endowment assurance with an immediate annuity starting at the maturity date. The endowment assurance be it withprofit, withoutprofit or unitlinked would be used as a savings vehicle, and the proceeds used to buy an annuity at maturity or possibly earlier, if reasonable surrender values are given on the endowment. Alternatively, but only if legislation allows, the policyholder could blow the lot on a huge party and a world cruise. Question Suggest two disadvantages from the policyholders perspective of the endowment plus immediate annuity structure despite the flexibility. Solution If the proceeds from the endowment must be converted to income at rates unknown until the annuity is purchased, this may introduce considerable uncertainty for the policyholder. It may also mean higher expenses, for example two lots of commission. End of question. The rate at which the proceeds of the policy in the deferment phase can be converted into an annuity might be guaranteed at outset, or current market rates might be used. Existence of a group version The group equivalent of a deferred annuity can be used by an employer to fund for pensions for employees. In particular, a group contract may be used when an employer closes an occupational pension scheme to buy out the benefits with an insurer.