Value Protection addresses head-on the concerns of those who believe an annuity could represent poor value if they were to die relatively young. It effectively creates a ‘win-win’ situation, because even if you don’t make it to age 75, you will at least be assured that either you or your dependants will have benefitted significantly from the pension fund accrued.
How Value Protection Works
A lump sum may become payable from your annuity in the event that you die before reaching age 75.
The maximum lump sum payable under Value Protection is the initial annuity purchase price, less the sum of the income paid from the annuity. Any Value Protection lump sum payable will be taxed at source at a rate of 35%.
Please note that the Value Protection option must be selected when you purchase your annuity – it cannot be added later.
A dependant’s annuity may also be paid. In this case, any Value Protection lump sum will be paid on the 2nd death, and will take into account the total amount of income paid to both the annuitant and the dependant.
The Value Protection options
Full Value Protection
Full Value Protection gives you the opportunity of providing a lump sum for your beneficiaries, if you die before reaching age 75, equal to the initial annuity purchase price, less the total amount of income paid. If you die after reaching age 75, no lump sum will be payable.
Partial Value Protection
Partial Value Protection operates in a similar manner to full Value Protection.
However, instead of protecting the full value of the initial annuity purchase price, you may select to protect a proportion of it. In this case, the lump sum payable will be the proportion of the initial annuity purchase price protected, less the total amount of income paid.
Other options available:
Lump sum/Income Guarantee
This option operates in a similar manner to Value Protection. However, if you die before age 75, but still within the selected guarantee period, the remaining payments due under the guarantee will be payable as a lump sum. If you die after age 75, no lump sum will become payable, but income will continue until the end of the guarantee period. Please note that if you choose this option, you cannot have Value Protection as well.
Choosing a dependant’s annuity ensures that an income will continue to be paid to your dependant (s), should you die before them.
If a dependant’s annuity has been selected with Value Protection, a lump sum will only become payable on the 2nd death, and will take into account the aggregate income paid to both you and your dependant. The lump sum only becomes payable if you die before reaching age 75, although the age at which the dependant dies does not affect the eligibility for a lump sum payment.
Who would benefit from Value Protection?
This annuity option may benefit you if:
- You are concerned about losing out of your pension fund in the event of early death, particularly if you are in ill health
- You are more interested in lump sum death benefits than an income
- You want a guaranteed income stream and the reassurance of a lump sum death benefit if you die before age 75
- 35% tax on lump sum death benefits may represent an income tax or inheritance tax saving for your family