Guide to Value Protection

Value Protection

Since 6 April 2006, it has been possible for an annuity to provide a return of capital on the death of an annuitant before age 75.

This facility is known as "Value Protection" and addresses one of the major concerns of customers: that they do not receive sufficient value from their annuity in the event that they die earlier than expected.

This guide explains the key risks and benefits of Value Protection, and how they compare to the other death benefit options available under other annuity options.

Annuity Death Benefit Options

No Value Protection/guarantee

An annuity provides you with an income for the rest of your life.

Unless a joint life annuity has been selected all income payments will cease on your death, and no further benefit will be payable.

Joint Life annuities

A joint life annuity ensures that an income will continue to be paid to your dependant(s), should you die before them.

You may select whether you wish for your income to continue in full to them, or whether it should reduce by a specified percentage.

On the death of you and your dependant (whichever is later), all income payments will cease, except where both deaths occur during the guarantee period selected.

Income guarantee

Under this option, you can specify a period of up to 10 years during which we will guarantee to pay benefits, even if you die during this time.

If you have chosen a joint life annuity, you may select at outset whether you would like the dependant’s pension to commence immediately on your death (with overlap), or after the guarantee period has expired (without overlap).

Lump Sum/Income guarantee

This option operates in a similar manner to the income guarantee. However, if you die before age 75, but still within the guarantee period, the remaining payments due under the guarantee will be payable as a lump sum, subject to a 35% tax charge.

If you die after age 75, no lump sum will become payable, but income will continue until the end of the guarantee period.

Full Value Protection

Value Protection gives you the opportunity of providing a lump sum on your death before age 75.

The maximum lump sum payable will be the initial annuity purchase price, less the total amount of income paid, minus a 35% tax charge.

If a joint life annuity has been selected, the 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.

If you die after attaining 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 investment, 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, minus a 35% tax charge.

Key Benefits and risks

• Each of the death benefit options seek to protect part of the value of your investment if you die earlier than expected.
• Value Protection is a means of protecting the value of an annuity in the event that you die before reaching age 75. In this event, a lump sum will become payable up to the amount of initial annuity purchase price less the aggregate amount of income paid from the annuity.
• A lump sum/income guarantee period ensures that the benefits of an annuity are received at least in respect of a specified term.
• Selecting a death benefit option will reduce the income payable from an annuity. Before selecting an option, you should carefully consider what income you will need for the rest of your life, and what other provision has been made for your dependants should you die before them.
• Please also note that inflation may erode the future value of your income/lump sum death benefit. In return for a lower initial income, you may elect for income payments to increase each year to keep track with inflation.
• A lump sum death benefit can only be payable if you die before reaching age 75. You will not receive a lump sum death benefit if you die after reaching this age.
• Any lump sum payable will be taxed at source at a rate of 35%. However, as the lump sum is a discretionary payment, this will normally avoid any further inheritance tax liability.

Please note: The tax treatment of the plan will, in part, depend on your personal tax status, which may be subject to change. Please refer to the Key Features for details of how benefits from your annuity will be taxed. Any references to taxation are based on our understanding of current legislation and HM Revenue & Customs practice, which is subject to change.