Value protection is an option you can choose when you take out your annuity that returns a lump sum to your beneficiaries if you die without having received the full value of your pension fund. It is sometimes known as annuity protection.

How does it work? When you take out your annuity, you can choose to protect a percentage of your pension fund, right up to 100%. The lump sum payable when you die is the percentage of your pension fund that is protected, less the total gross income already paid to you as an income.

Points to consider

  • The lump sum, if paid, will be taxed currently at the rate of 55%* before it is paid to your beneficiary
  • Some providers limit value protection so that it is only payable if you die within a certain time period, such as before your 75th birthday
  • The lump sum is not normally counted as part of your estate for inheritance tax purposes
  • The lump sum is paid either on your death or, if applicable, on the death of your surviving spouse, civil partner or dependant
  • If the total income paid out is more than the protected amount, no lump sum will be paid.

*It was announced in September 2014 that lump sum payments made after 6 April 2015 will be tax free, should you die before your 75th Birthday. If you die later, the lump sum will still be taxed but at reduced rate. Changes are subject to final legislation.

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