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Inheritance tax implication for Guaranteed Annuities

Press release: 22/07/2009

With annuity rates under pressure and consumers increasingly keen to protect the value of their annuity in the event of early death, flexible retirement solutions provider LV= has highlighted the risk of paying unnecessary inheritance tax (IHT) on annuities.

In an email alert to financial advisers, LV= highlighted that many annuities include five or 10 year income guarantees to try and protect their value in case the holder dies early. Despite any payments made under these guarantees being taxed as income they are often subject to a further charge to IHT.

LV= urges financial advisers to check who the annuity provider will make the income payments to. Unless the payments are made at the annuity provider’s discretion, it is likely that the value of the guarantee payments will fall under the annuitant’s estate for inheritance tax purposes.

Using the example of a male aged 65 buying an annuity now with a 10 year guarantee and receiving an income of around £7,000 per annum, the IHT payable could be £8,780 if the annuitant died after five years and the payments were not made at the provider’s discretion.

Matt Trott, head of annuities at LV= commented: “Protecting income in retirement is hugely important, and in the case of someone with a guaranteed annuity dying before the guarantee ends, extra inheritance tax charges could be an nasty surprise that the family of the annuitant do not need. Financial advisers can ensure their client’s dependants’ are not faced with a necessary tax bill, by checking who the annuity provider will make the income payable to. Unless these payments are made at the annuity provider’s discretion it is extremely likely that the value of the guarantee payments will fall under the client’s estate for IHT.

Further complications can also arise from income payments being made directly to an annuitant’s estate, because it prevents the estate from being wound up until the end of the guarantee period. It can also cause cash flow problems as the full value of the IHT charge must be met at outset.”

LV= offers a range of benefits under its annuity offerings, including income guarantees, lump sum guarantees and value protection. All of these are paid at LV=s discretion, ensuring that unnecessary IHT bills are avoided.

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LV= employs more than 3,800 people, serves around 3.5 million customers and members, and manages around £7bn on their behalf. We are also the UK’s largest friendly society (Association of Friendly Societies Key Statistics 2008. Total net assets) and a leading mutual financial services provider.