Tom has a Retirement Annuity Contract which is about to mature at €450,000. He is taking the ARF option but is required to purchase an annuity of €2,250 per annum, in order to avoid having to invest part of the plan value in an AMRF. Assuming an annuity rate of 4%, what amount will he have to use to purchase the annuity of €2,250 per annum?

• A. €23,625
• B. €42,850
• C. €56,250
• D. €63,500

Answer: (C)

This item tests how to convert a required annual income into the lump-sum amount needed at a given annuity rate. An annuity rate of 4% means that for each euro of purchase price you get €0.04 per year. To achieve an annual income of €2,250, divide the income by the rate: 2,250 ÷ 0.04 = €56,250. So, Tom would need €56,250 to purchase the annuity that pays €2,250 each year. The other figures would correspond to different assumed rates (for example, a higher rate would require a smaller lump sum, a lower rate would require a larger one), but with a 4% rate, €56,250 is the correct amount.