How Capital Protected Annuities Work

Capital protected annuities work by returning the unpaid annuity income should the annuitant die before age 75. There is a tax charge of 35% which is taken from the unpaid income.

When you give your pension fund to an annuity provider you exchange it for an annuity. When you die if you have not bought some kind of protection then your annuity dies with you.

What Annuity Capital Protection Options are there?

When you purchase your annuity shape you can build in a continuing pension to a spouse or civil partner, you can purchase this up to a maximum of 100% of the annuity income. This option can be quite expensive and therefore lowers the amount of initial income quite considerably.

Another option you can purchase is a guaranteed payment period, this can normally be purchased for a maximum of 10 years. Guaranteed payment period works by simply continuing to pay the income for the remaining term after death. An example: if annuity income was £6,000 per annum and the annuitant purchased a 10 year guarantee payment period and subsequently died after 6 years then the annuity income of £6,000 would be paid for a further 4 years. Purchasing a guarantee period is relatively inexpensive and should considered in most cases.

A third option to capital protect annuities is called ‘Value Protection‘ and works by returning any unpaid income less a 35% tax charge. It can be written into an annuity contract on a single life, joint life first death or joint life second death basis. Example: 65 year old male make an annuity purchase using value protection with £100,000 and has an income of £6,000 per annum. He dies after 5 years having taken income of £30,000 from the annuity. The unpaid amount from his annuity is £70,000 which can be paid out less a 35% tax charge of £24,500 therefore his estate receive £45,500.

It is very important to consider capital protecting your annuity in one way or another as otherwise your annuity will die with you.

Value Protection – Is it worth the cost?

Value Protection (sometimes known as annuity protection or capital protection) is an option that returns a lump sum if the annuitant dies before their 75th birthday, giving the ability to protect a percentage of the pension fund, right up to 100%.

The lump sum payable on death is the percentage of the pension fund that is protected, less the total gross income already paid to the annuitant(s) as an income. The lump sum, if paid, will be taxed, currently at the rate of 35%.

Points to Consider

  • Provides a return of money to the client’s nominated beneficiary should death occur before age 75.
  • Protect up to 100% of your pension fund.
  • Available on a single or joint life basis
  • Dying after age 75 will result in no lump sum being paid.
  • Any lump sum will be taxed at 35% before it is released to the nominated beneficiary and is not normally counted as part of the estate for inheritance tax purposes

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