Tax Simplification introduced a new option called Annuity Protection. If the annuitant dies before their reaching 75th birthday and they have not received a certain total amount of annuity payments by that time, the balance will be paid as a lump sum. This lump sum is called an annuity protection lump sum death benefit and is taxable at 35%.
For example if an annuity for £ 100,000 paid an income of £ 7,000 per annum and the annuity died after 5 years, the difference between the capital invested and the total of annuity payments received is £ 65,000. If the annuitant had chosen 100% annuity protection, a payment of £ 42,450 (£ 65,000 less 35% tax). If only 50% annuity protection had been selected, then a payment of £ 21,250 (£ 32,500 les 35% tax) would be paid.
Annuity protection can be arranged to be paid out on the death of the annuitant or, if it is a joint life annuity, on the death of the 2nd annuitant.
Although annuity protection provides a valuable benefit it may not prove to be a popular option because annuity protection ceases after age 75 and it is a relatively costly option. For example, annuity for a 65 year old man with 50% annuity protection will pay the same income as an annuity with a 10 year guarantee.
|
Value Protection |
|
Value Protected Annuity |
100% |
75% |
50% |
|
|
|
|
|
|
Annual Income |
£ 5,813 |
£ 6,000 |
£ 6,11 |
|
|
|
|
|
|
|
Guarateed Period |
|
Standard Annuity |
10 Year |
Year |
Nil |
|
|
|
|
|
|
Annual Income |
£ 6,049 |
£ 6,152 |
£ 6,186 |