The Retirement Account
Annuity death benefits:
dependant’s income or long-term
guarantee period?
Before April 2015, annuity income guarantee periods were limited to 10 years, so most couples tended to
choose a dependant’s (joint-life) income to address the risk of the main annuitant dying first.
Due to changes in legislation and product innovation longer guarantee periods of up to 30 years now
offer clients an alternative way to protect their partner. For example over 40% of our Retirement Account
applications in the last year included income guarantees longer than 10 years. So how do you decide which
is best?
Dependant’s income vs income guarantee (using The Retirement Account)
Dependant’s income
Income Guarantee
Payable to any
beneficiary?
No. A named dependant is
selected at the outset of the
policy and must be a spouse,
civil partner or an unmarried
partner who is living with
and financially dependent (or
interdependent)1 on the main
annuitant when the Guaranteed
Annuity is purchased.
Yes, payable to named
dependant or other
beneficiary.2
Can be commuted to a
lump sum?
No.
Yes, any outstanding
guaranteed income
payments can be exchanged
for a lump sum which we
calculate at the time.3
Income is guaranteed
to be paid for a specific
period of time?
No, income will cease on the
last death of the annuitant or
dependant.
Yes, in the event of the
death of the annuitant the
income continues to be paid
for the remainder of the
guarantee period.
Payable for life of
dependant
Yes, income is paid for the
lifetime of the dependant
(assuming they die after the
main life).
No, income will stop at the
end of the guarantee period
assuming the main life dies
within this time and before
the second life.
Can you reinvest death
benefits into Pension
Drawdown to save
tax? (not available in a
traditional annuity)
Yes, income can be reinvested
into Drawdown or cash to save
tax.
Yes, as per dependant’s
income (and available as a
lump sum if commuted).
What should be considered?
A.
B.
C.
What level of income each option provides, both initially and on the death of the main life.
How long is the main life/dependant likely to live?
How important is it to leave a legacy for loved ones (including children)?
1 This is a Retirement Advantage rule, in line with most annuity providers (legislation permits the second life to be anyone).
2 If both a dependant’s and income guarantee are chosen, only the named dependant will receive the payments. Should the named dependant have died, or die during the guaranteed income period, we will exercise discretion over who the beneficiary (ies) is.
3 The commutation value will be broadly speaking the discounted value of the future income payments.
For financial adviser
use only - not for retail
customers
Meet Justin and Gill
Justin is aged 65 and has
pension assets after taxfree cash of £100,000.
They are both in good health
and have two grown up
children.
He is married to Gill,
age 62.
Justin’s wife will need the
same income as him should
he die before her.
After meeting his financial adviser two options are considered:
100% dependant’s pension
30 year income guarantee
This will ensure that Gill receives 100%
of Justin’s income for the rest of her life
should he die before her. Gill will be named
as the dependant at outset (this cannot be
changed). Should Justin outlive his wife,
income will cease on his death.
This guarantees that income payments
are made for the next 30 years, whether
he (or Gill) are alive or not. This benefit is
payable to any beneficiary at the discretion
of Retirement Advantage.
Considerations
1. What income level each option provides.
100% joint life
30 year guarantee
Income is almost identical4.
£4,273
£4,270
2. How long are they likely to live?
89
86
Justin
usti
n
Probability of
being alive 30
years after the
annuity started
Gill
J
Average life
expectancy
21%
Gill
42%
It’s important for them to assess how long they
are likely to live. According to life expectancy
tables5, Justin would expect to live to age 86,
21 years after the annuity starts. Gill would
expect to live for 27 years, until age 89.
Justin has a 2 in 10 chance of being around
after 30 years, and Gill has a 4 in 10 chance.
A 30 year income guarantee would be paid to
any beneficiary for 30 years even if the two of
them die earlier than that.
Their decision
They decided to choose a 30 year guarantee because:
• They (or their children) would get back at least £128,100 in income (£4,270 x 30 years), substantially
•
•
•
more than the original £100,000 pension amount.
The joint life option could provide more income if they live a long time. As an example if Justin died first
and Jill lived to age 90 then they would receive around £141,000 in total.
But equally the income paid could be very low (for example if they both died within 5 years they would
only receive £21,365).
If Justin died before the end of the 30-year guarantee period the beneficiaries have the option to take a
lump sum as opposed to continuing income.
The above decision was an individual choice. It is important that the client understood that, by
choosing the 30 year income guarantee, Gill’s income payments would stop after 30 years if she was
still alive. Every case is different, but this example illustrates some of the factors that you may wish to
consider with clients.
4 Source: Income figures from Retirement Advantage, January 2017, level payment, healthy lives.
5 Source: All life expectancy figures are courtesy of the ONS (Cohort 2014 date)
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