With a conventional annuity your income payments continue until you die.
Once you die, they stop altogether. There are two potential risks arising from this:
- You die fairly soon after purchasing your annuity and the majority of the money you saved into your pension is lost
- Anyone reliant on your income will receive no further payments and this may leave them at a significant financial disadvantage (in which case you might want to consider a dependant’s annuity).
Most annuity providers offer the option of taking out a guarantee period with your annuity that ensures it will be paid for the duration of the guarantee period, even if you die. You can decide on anyone to be your beneficiary – either directly with the annuity provider, or in your will.*
Length of time you can guarantee
The guarantee period is usually anything between 1 and 10 years – you are free to decide. However, the longer the guarantee period is for, the less you will receive as income from the outset and you will need to weigh up the benefit of the guarantee period with the downside of a reduced income.
You may feel the cost is worth the extra peace of mind – it is worth asking your financial adviser to provide a comparison of the costs with or without a guarantee period.
After the guarantee period ends
If you live past the guarantee period your income will continue, but once you die, your payments will cease.
*It was announced in the Chancellor’s Autumn Statement on 3rd December 2014, that on or after 6th April 2015 all Joint-life annuities can be paid out to any beneficiary and where an individual dies under age 75 with a joint life or guaranteed term annuity, any payments to beneficiaries will be tax free.
If you die later, the income will be taxed at the dependant’s marginal rate of tax. Changes are subject to final legislation.