If you have a partner or other dependants, such as children, you might want to think about additional retirement income protection. With income protection, your named dependants could get some or all of your retirement income if you die, either as regular payments over a period of time, or as a one-off lump sum.
Having a guarantee period means your retirement income will be paid out for a specific number of years from the time you start taking a pension income. Guarantee periods are often for five or ten years, but you can usually choose any period of years up to 10 years. If you die during this period, your pension income could be paid to your partner or other named dependants, such as your children.
Sometimes if someone dies during a guarantee period, a lump sum payment is made to their estate instead, in which case tax might need to be paid on the money.
You shouldn’t see a guarantee period as an alternative to a joint retirement income. This is because any income will stop at the end of the guarantee period, rather than when your partner or dependants die. That would mean they could be without an income for a period of time.
A guaranteed period is more frequently used in addition to a joint-life annuity. This is because the cost of the additional benefit is minimal compared to the added protection it provides should you die in the early years of your retirement.
An annuity protection lump-sum death benefit is another way of ensuring your retirement income doesn’t stop when you die.
When you die, your estate or beneficiaries receive a lump sum of the difference between the fund value used to buy your annuity less the gross pension payments received prior to death.
In most instances, there is a tax charge of 55 per cent on the lump sum. And depending on the amount of money left in your estate after the payment is made, there could be an inheritance tax charge too.
An annuity with a guarantee period or with a lump-sum death benefit will typically be more expensive than a straightforward annuity. This means the income you get will be lower. Not all providers offer all the different types of retirement income protection.