Compulsory purchase annuity meaning

An annuity that must be bought at retirement to provide the member’s pension where the rules of an insured occupational pension scheme (or the relevant insurance policy) require annuitisation rather than drawdown or cash. In practice, trustees apply the member’s accumulated fund to purchase an individual lifetime annuity from an authorised insurer, with terms (for example, indexation, spouse’s/dependants’ benefits and guarantee periods) reflecting the scheme’s benefit design. This is a descriptive pensions and insurance term, not a defined statutory concept. Its key features are: mandatory annuity purchase on retirement or benefit crystallisation; use of the open market option to secure competitive rates; transfer of investment and longevity risk to the insurer; and general irrevocability once the annuity is in payment. Usage is broadly consistent across England & Wales, Scotland and Northern Ireland. Following UK “pension freedoms”, there is no legislative requirement to annuitise, but scheme or policy terms may still mandate a compulsory purchase annuity unless amended. In Ireland, while many defined contribution members may opt for an ARF/AMRF (now ARF) or other options where permitted, some scheme rules or buy-out bonds require annuity purchase, making it compulsory in those cases.