The options available under the new pension reforms have been fairly well documented by now, particularly the revolutionary change that has given retirees the ability to take their whole fund in cash if they choose to.
But some developments that are perhaps less well known following the reforms of April 2015, are the enhancements to death benefits.
Addressing a common objection
One of the common objections to purchasing a single life annuity has always been that when you die, your fund dies with you. This can be a distinct disadvantage, especially if you pass away in the early years, as you would not necessarily have had value for money.
This ‘drawback’ is of course balanced out by the guarantee that you will continue to receive your annuity income for life regardless of how many more years you go on to live for. If you are lucky enough to enjoy a long lifespan, the longer you live, the more you will benefit.
However, it is a fact that unless you have certain death benefits in place then,when you pass away, your annuity income will cease to be paid.
If you wish to ensure that your annuity will continue to pay out to your loved ones or to your estate even in the event of your death, then you have a number of protections and options available to you, some of which have been introduced or improved following the reforms.
Your annuity death benefit options…
Joint Life Annuity
With a joint life annuity the payments from your pension fund will continue to be paid to your partner, dependents or any beneficiary you wish to nominate in the event that you die before they do.
Under this option you will be paid a smaller income from your fund from the outset than that which you would have received from a single life annuity. However, if you die before age 75 a joint life annuity enables the continuing income to your beneficiaries to be paid tax-free for the rest of their lives. You can read more about this further on under ‘Tax implications’.
For some time now, annuity customers have been able to add a guarantee period to their annuities. The most popular guarantee periods are around 5 or 10 years as this can be best value for money.
The purpose of a guarantee period is to provide the assurance that your income will continue to be paid from the annuity even if you were to pass away during the period you select.
The great news is that since the reforms of 2015, this guarantee period has been extended and some providers now offer guarantee periods of up to 30 years!
This is generally considered as an alternative to a guarantee period (which helps to protect your income) in that value protection provides a lump sum from your remaining pension fund to your beneficiaries, in the event of your death.
Essentially, this sum is calculated by taking the amount you invest in your annuity, less any tax-free lump sum, and deducting any income payments already received at the time of your death. This money is then returned to your nominated beneficiary.
This can be a valuable benefit for your loved ones, especially in the early years of your retirement, but can be an expensive option as it can result in the level of your annuity income being significantly reduced.
Value protection can be far less expensive with a fixed term annuity where the selected term is over a shorter period (usually around 5 – 10 years, for example) as the value protection only needs to cover that term, as opposed to the rest of your life under a lifetime annuity.
Perhaps the most significant and relatively unknown changes of the April 2015 pension reforms is that, if you were to pass away before the age of 75, the income or lump sum that could be paid out from the guarantee period or value protection above, would be tax-free in the hands of your beneficiaries.
This would almost certainly provide better value for money!
If you die over the age of 75, then your loved ones may still be able to recoup some or all of your remaining fund, but it will be subject to tax at their marginal rate of income tax.
Making your decision
If you have any questions about death benefits or any other annuity related queries, then it is important that you speak to an annuity specialist, like Retirement Line.
With so many options available, you need to be sure that you understand everything fully before making a decision. It is also vital to shop around for competitive annuity quotes to ensure you are getting the best deal. Rest assured, our highly-trained specialists can do all of that for you.
Speak to a Retirement Line specialist today by calling 0800 652 1352 or 01733 307 240. Or click here for a call back from one of our specialists.
Retirement Line work on a non-advised basis, providing factual information to enable you to make your own informed decision.