Value Protection allows you to protect all or part of the fund used to buy your annuity
if you die. The amount paid depends on when you die and whether you’ve chosen for a beneficiary to receive your annuity payments.
If you haven’t chosen a beneficiary’s annuity, when you die your annuity provider will firstly add up all the income payments paid to you before tax. If this is less than the amount of value protection you chose your annuity provider will pay the difference as a lump sum.
If you have chosen a beneficiary’s annuity as well as value protection, when you die, your annuity provider will wait until your beneficiary also dies, and then add up all the income payments paid to both of you before tax. Similarly, if this is less than the amount of value protection you have chosen, your annuity provider will pay the difference as a lump sum. If you die before age 75, the amount paid to your beneficiary will be tax-free.
If you die aged 75 or older from tax year 6th April 2017 onwards, the amount paid will be taxed at the beneficiary’s personal rate of income tax.
How value protection works - a scenario
Jean bought an annuity with £50,000 in 2015. Jean passed away aged 75 having received a total of £4,000 income by this time. As she had chosen to have full value protection, a payment of £46,000 would be made; if not, Jean's annuity payments would stop.
Any reference we make to taxation are based on our understanding of current legislation and HM Revenue & Customs practice, which can change.