What happens to an annuity when you die?

Written by the Retirement Line Team

You can arrange for your annuity income to be paid to a loved one

When you choose to turn your pension savings into income with an annuity, payments will by default simply end when you die. Any remaining pension fund then goes back to your annuity provider. 

However, you can ensure that a beneficiary receives money from your annuity after you die. If this is something you are interested in, we can help. As the UK's largest pension annuity broker* we talk to thousands of people a year about their options for annuity death benefits.

In this guide to who gets your annuity income when you die, we look at the options to help you think about what’s best for you. You can also call our team of Annuity Specialists on 0800 652 1316 or request a call back. They’ll be able to explain further and obtain quotes on your behalf from the leading UK annuity providers. 

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How does an annuity work?

An annuity lets you turn money you have saved into a personal pension or a company ‘defined contribution’ pension scheme into a regular income. Annuity providers agree to pay you this income in return for the money you have saved into your pension.

The annuities we can arrange for you with the UK’s leading annuity providers offer guaranteed income, unaffected by changes in interest rates or the stock market. You can choose to take your income until you die with a lifetime annuity, or for a set amount of time with a fixed-term annuity. 

What happens to an annuity when you die?

Unless you choose otherwise, when you pass away your annuity payments will stop. This means that if you die soon after arranging your annuity, your loved ones will lose the majority of the money you have saved in your pension. It won’t automatically become part of your estate. 

You may be comfortable with this default arrangement. For example, it may be that nobody else would rely on your annuity income for their own financial security. 

However, is there a possibility that your spouse, partner or other beneficiary will struggle for money after your annuity payments stop on your death? 

If that is the case, you may wish to consider options when it comes to what happens to an annuity when you die. Instead of payments ending and your pension fund no longer benefiting your loved ones, you can arrange for a beneficiary to receive an income or lump sum. 

What are my options for leaving income for a beneficiary?

You can decide to take less income from your annuity while you are alive, choosing instead to ensure that a beneficiary receives something when you pass away. You have three options for this, which we’ll explain below:

1. A joint life annuity

2. A guarantee period

3. Value protection

1. A joint life annuity 

The first option is for you to arrange what is known as a joint life annuity. With a joint annuity, the annuity income payments continue to be paid to your partner or dependents should you die before them. 

Payments to the beneficiary will continue in one of two ways, depending on the type of annuity:

• With a lifetime annuity, payments continue until your beneficiary passes away.

• With a fixed term, payments continue until the end of the annuity term.

You can decide the percentage of your original annuity income that you want to continue to be paid after your death. For example, you might want it to be halved, in which case you’d choose a 50% joint life annuity. Or you might want the annuity income to continue to be paid in full, in which case it would be a 100% joint life annuity. 

Choosing a joint annuity will reduce the size of the payments you receive during your lifetime. The greater the income that’s paid after you die, the smaller your payments while you’re alive.

Is the beneficiary’s health and lifestyle taken into account?

An enhanced annuity typically pays you more income than a conventional lifetime annuity if you qualify on account of your health or lifestyle. An adverse medical history, current medical condition or some lifestyle choices such as smoking could mean you receive more income.

If you do not qualify for an enhanced annuity but your chosen beneficiary does qualify, your provider may offer you a joint life annuity at enhanced rates. This is because they take the health and lifestyle of both people into account. 

But what if you qualify for enhanced rates and your beneficiary is healthy? In that case, choosing a joint life annuity could reduce the level of extra income you receive. The annuity provider would have to factor in your beneficiary’s longer life expectancy.

2. A guarantee period

An annuity guarantee period is where you choose for your annuity provider to pay income for a guaranteed term, even if you pass away within that period. 

For example, if you choose a ten-year guaranteed period and die five years after taking out your annuity, your beneficiary will continue to receive the income for another five years. Alternatively, they may be able to take a lump sum when you die. 

Each annuity provider will have its own maximum period, with some offering up to 30 years. 

Choosing a guaranteed period will mean you receive less income from the annuity while you are alive, compared to an annuity with no guarantee period.

3. Value protection

A third annuity death benefit option is value protection, sometimes known as ‘annuity protection’ or a ‘value protected annuity’. Adding value protection means your annuity provider will pay a lump sum to your beneficiary when you die. 

This payment would reflect how much money is left in your pension fund after taking any tax-free cash and income, and how much of it you choose to protect. 

For example, let’s say you choose to protect 50% of your fund. If your fund is £100,000 and you pass away after receiving a total income of £20,000 from your annuity, your beneficiary will receive £40,000 (50% of the £80,000 remaining fund).

You can choose to protect up to 100% of your fund. But the more you protect, the less income you’ll receive from your annuity while you’re alive.

Types of annuity death benefits