After enduring several years of exceedingly low interest rates, annuity rates have seen significant uplifts, reaching their highest levels in nearly two decades. As a result, interest in annuities has surged.
However, research from Standard Life revealed half of those aged over 50-years-old do not fully understand how annuities work, and one in five believe that opting for an annuity entails the risk of depleting their funds in later retirement years.
There has also been an equally positive trend in the cost of including guarantees within annuities, and the case for building guarantees into annuities is now even more compelling in the bid to deliver attractive overall returns and good outcomes, even in the event of an annuitant’s early death.
Annuity death benefits
Although death benefit options are available, in practice only a small proportion of customers select any of these benefits when purchasing their annuity, as the tendency is to prioritise the highest possible initial income.
There are three types of benefit available on annuities that are designed to pay out either an income or lump sum to a dependant or beneficiary when the annuitant passes away, these are:
- beneficiary’s annuity;
- guaranteed payment period; and
- value protection.
Unfortunately, not including death benefits within the annuity can lead to poor outcomes, which can also mean having some difficult conversations with dependants and beneficiaries, as they still have a need for some level of financial support after the client has died.
This article will cover each death benefit in detail and demonstrate how your clients’ dependants or beneficiaries could benefit if a client were to pass away earlier than expected.
Beneficiary’s annuity
Before April 6 2015 only a dependant could receive an annuity as an authorised pension payment following the death of a family member. From April 6 2015, in addition to a dependant, an annuity can also be provided to a nominee and a successor.
A beneficiary’s annuity is the collective term for an annuity payable to either a dependant, nominee, or successor.
A beneficiary’s annuity contract can only be purchased from an insurance company using funds held under a money purchase arrangement.
- An annuity payable to a dependant is called dependants’ annuity.
- An annuity payable to a nominee is called nominees’ annuity pension.
- An annuity payable to a successor is called successors’ annuity.
A successor’s annuity can only be purchased after the members death, while a dependant's annuity and a nominee’s annuity can be set up in the members lifetime and/or after their death.
Including a dependant’s or nominee’s annuity allows for the annuity income to continue to be paid to someone else when the main annuitant passes away.
At outset, the annuitant can choose for the income to continue to be paid in full to the dependant or nominee or the annuitant can choose a percentage of the income to continue.
Dependants' and nominee annuities can often be overlooked but are an important feature. If the annuitant were to pass away and the annuity income was to stop, could the surviving person afford the upkeep of their home or to maintain their current lifestyle?
