Section 721: Exempt sum: term dependent solely on duration of life
2774.This section sets out the formula for calculating the exempt sum where:
the term of the annuity does not depend on any contingency other than the duration of a human life or lives; but
the amount of the annuity payments does depend on some contingency other than the duration of a human life or lives.
2775.Under this type of annuity the amount of the annuity payment may change in an unpredictable way. As changes in the amount of the annuity payments are unpredictable, any actuarial valuation of them would be virtually impossible. So the exempt part of each annuity payment is calculated as a constant sum.
2776.An example of an annuity of this type is an index-linked annuity where the amount of the annuity fluctuates with movements in the Retail Prices Index. Initially the return under this type of annuity is low and the annuity payments may fall short of the amount of the exempt sum. With inflation the amount of the annuity payments is likely to rise and in due course to overtake the amount of the exempt sum.
2777.The term of the annuity can only be predicted by an actuarial calculation. Again, a consistent approach to that calculation is ensured by subsections (3) and (4) (see further the commentary on section 720(3) and (4)).
