Here at annuitysupermarket.com we get asked many times about the ‘Tax treatment of annuity death benefits‘. Obviously at a time when people are coming to terms over the death of a loved one, the last thing they would want to worry about is sort out the tax issues over the annuity payments after death.
We would like to summarise for you the likely scenario in the event of the death of an annuitant. The main question we are asked is; Are benefits included in the estate for inheritance tax purposes?
Where benefits payable under a guarantee period or value protection are distributed at the discretion of the scheme trustee, administrator or the annuity provider, the benefits fall outside of the estate for inheritance tax purposes. The annuitant is still able to nominate beneficiaries by the means of an expression of wish form. The scheme trustee, administrator or annuity provider will take the wishes of the annuitant into account, but are not bound by these and will make a decision based on the annuitant’s circumstances at the time of death.
Where the benefits are subject to a binding nomination, such as a will, they are said to be “payable as of right” to the personal representatives and the value of the benefit will be included in the estate for inheritance tax purposes. For value protection, the value is simply the amount of lump sum paid but for guarantee periods paid as continuing instalments, the open market value of the payments is calculated as per the HMRC calculator.
For example, an annuity of £10,000 which continues after death for a further eight years has an open market value of nearly £47,000, which would give rise to an Inheritance tax liability of up to £19,000. If the annuity provider retains discretion over who can receive these benefits, this inheritance tax charge can be avoided. Source: Just Retirement
Because annuities can be so complicated we always recommend that you seek independent financial advice before purchasing an annuity. Independent financial advisers are the only ones that can recommend a product from the entire annuity market. Why settle for less when the best annuities may come from a provider that does not sell directly to the public.
You only get one chance to buy the right annuity so don’t cut corners get advice.
At retirement shopping around to choose the best pension annuity for you can reap huge rewards in income gains. The difference between the best and worst pension annuity rates can be 20%.
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