What is Proportion and Overlap?
The first thing to consider is whether or not the annuity is paid in advance or arrears. If it is paid in advance then the first payment occurs at the start of the period; in the case of annually paid annuities this is significant because to have an annual annuity paid in arrears would mean waiting 365 days after the annuity starts before the first payment is made.
Lets assume you have chosen an annuity payable annually in arrears… what if you die half way through the year? You would receive no payment, that’s bad news!
If you choose to have proportion included in your annuity then you would receive 6 months income if you lived 6 months or 9 months income if you live 9 months of the year in which you die – in other words you receive a payment equal to the proportion of the year that you have lived without an annuity payment.
Proportion can be included for monthly payments, in this case you would receive a proportion payment equal to the number of days that you were alive in the month.
This is available to people with joint life annuities that have purchased a guarantee. Lets assume that you buy a joint life annuity with a 5 year guarantee reducing by 50% on your death. Your income is £1,000 pa and your spouse’s income will be £500 pa after your death.
Without overlap… your annuity payment will cease immediately and the lower payment applicable to your spouse will commence. Even if you die before the 5 year guarantee has been discharged.
With overlap… if you die within the guarantee period (assume at the 2 year point leaving 3 years of the guarantee) then your annuity will continue to be paid for a further 3 years at the full rate alongside your spouses annuity at the 50% rate. After 3 years when the guarantee is exhausted your annuity payment ends and your spouse continues to receive their own annuity.
|Without Overlap||With Overlap|
|Year||Your income||Spouses Income||Year||Your income||Spouses Income|