Advice on annuities and death benefits

Scott Wood.
Scott Wood.

With the recent changes to pension rules, there has been a drop in the number of annuities purchased by people accessing their pension funds.

An annuity is a financial product that allows you to convert your pension savings into a regular income that will last you for the rest of your life.

One downside that is sometimes levelled at annuities is that on death the pension fund has been “lost”.

The thinking behind this is that if the individual dies in the early years after having bought an annuity, they will not have received enough payments to have returned the amount of pension fund used to buy the annuity in the first place.

Whilst this can be true, annuity death benefit options might go some way to help address this point.

It should also be remembered that the contributions to the pension have benefited from tax relief and so perhaps a better approach is to assess the income paid out against the actual net cost to the individual.

Additional peace of mind when considering annuities can be gained by incorporating some of the available death benefit options at retirement.

The inclusion of death benefits comes at a cost which will be seen in the amount of the annuity, i.e. the more death benefits that are included, the lower the starting annuity will be.

That’s because the liability and risk to the annuity provider increases where death benefits are included.

An example of a death benefit option is to include a “guarantee period” - a minimum period of time for which an annuity will be paid irrespective of how long the individual lives.

The maximum permitted guaranteed period under a pension annuity is ten years meaning that if a member has an annuity that is paid monthly, it has a guaranteed period of 10 years.

If the member dies after four years, monthly annuity payments will continue for another six years.