Value Protection Annuities

Under value protection, upon death of the annuitant prior to their 75th birthday, a lump sum may be paid. It is calculated as the original annuity purchase price less total gross payments made to the date of death and is subject to tax at 35%.

Under joint life annuities, there are two options:

 

• 1st Life - Value Protection will become payable on death of the annuitant before their 75th birthday and will be paid out at the time of the annuitant's death. The spouse or dependant pension would then be paid in the normal way.
• 2nd Life - Value Protection will be triggered by the death of the annuitant before their 75th birthday and will be physically paid out at the time of the death of the last survivor. The value of the spouse's or dependant pension will then count towards the total gross payments when they are deducted from the purchase price. Value protection must cease by age 75, so if the annuitant lives beyond their 75th birthday, no lump sum benefit can be paid on their death. Cost will vary depending on age, health and sex but is not likely to be far out of line with the cost of guaranteed periods for single lives in most cases. For joint lives, the 1st Life option will be more expensive than the 2nd Life option.

Some Life Offices also offer the option of a reduced amount of Value Protection. For example, the annuitant can select 50% Value Protection, which would guarantee they would receive at least half of the purchase price in total, by taking 50% of the purchase price less total gross payments made to the date of death. This can reduce the cost considerably. Any proportion lower than 100% can be selected.

Comparison with Income Drawdown (USP).

Many annuitants may wish to take income drawdown because the remaining fund on death before age 75 can be taken as a cash sum (subject to 35% tax). In order to receive this benefit, you have to accept a high degree of investment risk. Using Value Protection under an annuity will offer the prospect of some return of capital while avoiding investment risk.