Taxation of beneficiary annuities
If the annuity was purchased during the member's lifetime (usually as a joint annuity), and they died before age 75, the beneficiary’s annuity will be paid free of income tax.
If they died after age 75, the beneficiary’s annuity will be taxable at the recipient’s marginal tax rate.
Guaranteed payment periods
A guaranteed payment period is designed to guarantee a specific number of years from outset that the annuity income will continue to be paid. If your client passes away during the guaranteed payment period, the income will continue to be paid for the remainder of the period to the beneficiaries.
Selecting a longer guaranteed payment period reduces the level of the initial annuity payment.
Since April 2015, guarantee payment periods of up to 30 years have been available. This enables you to recommend an option that ensures your client (or their beneficiaries) receive income at least equal to the initial amount used to purchase the annuity.
Even if your client is not willing to take the drop in income level to have this length of guaranteed payment period, it is a particularly useful discussion to have as it helps demonstrate the value in an annuity without such protection.
There is a clear trade-off between higher income during your client’s lifetime versus certainty of return in the event of their death.
It provides reassurance to your client and their beneficiaries that they are guaranteed to get a specific amount of their pension pot back. A small, guaranteed payment period can be relatively inexpensive, however it can be of immense value to a beneficiary.
Taxation of guaranteed payments
If the annuitant is under 75 when they die, the remaining payments will not have any income tax deducted. If they are 75 or over, the remaining payments may have income tax deducted.
Any income paid to their estate may be subject to inheritance tax.
Value protection
It is often said that clients considering their options at retirement do not choose annuities because their beneficiaries get nothing back when they die. Value protection addresses that concern.
Value protection provides the option for your clients to protect their hard-earned pension savings pot against early death and for a lump sum balance to be paid to a dependant on their death.
Value protection allows the annuitant to select up to 100 per cent of the fund used to purchase the annuity (less any annuity income received) to be paid out to their beneficiaries on their death.
Any percentage can be chosen to suit the needs of your client.
Taxation
If your client dies before age 75, the beneficiaries will not pay any tax on the final lump sum.
