Written by the Retirement Line Team
You can arrange for your annuity income to be paid to a loved one
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.
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.
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.
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:
A joint life annuity
A guarantee period
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 annuity, 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.
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.
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.
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.
Joint life annuity
Prior to the UK pension reforms of 2015, the beneficiary of annuity death benefits had to be your spouse, legal civil partner or a qualifying dependant. But since the reforms, you can choose whoever you wish to be a beneficiary as long as your annuity provider agrees.
Our Annuity Specialists will of course be happy to help by providing information about your options.
As we’ve mentioned above, choosing annuity death benefits may reduce the level of retirement income you receive while you’re alive. The more money you decide your beneficiary will receive after you die, the more your own income will reduce.
Your annuity provider will also look at your beneficiary’s age when calculating your own annuity income level. For example, if your beneficiary is younger than you, the annuity provider may offer you less income than if your beneficiary was older. This is because they take into account how long they might have to pay an income.
Each annuity provider has their own approach to joint life annuities and other annuity death benefits and their effect on your annuity income. This is why shopping around for the most suitable plan when buying an annuity is important – and this is the role we play on your behalf as an annuity broker.
It is of course your decision about whether annuity death benefits are right for you and your loved ones. Some things you may want to consider when making this decision include:
How much other income would your partner/spouse or other beneficiary have should you die before them?
Do they have their own pension now, or is one due to start paying them an income in the future?
How much savings or investments will they have?
Do you have life insurance, and how much would it pay out?
What level of income would your beneficiary need to live comfortably should you pass away before them?
What level of income do you need now, and can you afford to take less in return for adding death benefits to your annuity?
Retirement Line can’t advise you on what to do. However, we can provide quotes to show the effect that death benefits and other annuity options will have on your annuity income.
Any of the above annuity death benefit payments are tax-free if you die before age 75. If however you die after reaching age 75, there will be taxes on annuity death benefits paid to your beneficiary. They are normally taxed at your beneficiary’s marginal tax rate.
You should remember that choosing a joint life annuity or other death benefit options will reduce the amount of annuity income you receive from the outset. Ask one of our Annuity Specialists for a breakdown of the annuity figures so you can make an informed decision.
If you’re thinking of adding a death benefit to your plan, our Annuity Specialists will be happy to provide annuity quotes from different providers. You’ll be able to compare options and their effect on your income.
You could also benefit from preferential annuity rates that we help to secure. This is due to our position as the UK's largest pension annuity broker* and our close relationships with the UK’s best annuity providers.