Even those fortunate enough not to have gone through this themselves can surely empathise with how difficult it must be.
So imagine the additional anguish you would feel if you discover there are no further payments coming from your late partner’s annuity leaving you in financial hardship.
This can be an all too familiar scenario despite the importance of proper consideration of death benefits being clearly highlighted in flashing lights in annuity providers’ product literature. It can lead to some really difficult conversations with dependants who still have a need for some level of financial support after the annuitant has died.
Whilst not everyone has a need to add death benefits to their annuity, ABI data shows that only 30 per cent of annuities taken out in 2020 had a dependant’s income payable on death of the customer taking out the annuity. This is despite ONS stats showing that 76 per cent of men and 68 per cent of women aged 65-69 are living as a couple.
It certainly feels like there is a clear gap here between clients' need to provide for dependants on death and the choices being made by those who do value secure income for life over the flexibility of drawdown.
There are three types of death benefit that can be chosen when buying an annuity with your pension savings – Dependant’s Income, Guaranteed Payment Period and Value Protection.
Dependant’s Income – Allows for the annuity income to continue to be paid to a named dependant when the main annuitant passes away.
Dependant’s Income can be overlooked but it is an important feature to consider. If the annuitant was to pass away and the income was to stop, could the surviving dependant afford their outgoings for the rest of their life without this income?
Guaranteed Payment Period – Designed to pay the annuity for a guaranteed number of years from outset. If the customer passes away during the period, the income will continue for the remainder of the period to their beneficiaries.
This can give peace of mind that income will continue for that chosen period should the worst happen and may meet a specific temporary essential income need e.g. up to State Pension Age.
Guarantee payment periods up to 30 years are available, allowing advisers to recommend an option that ensures the total gross income received is at least equal to the amount used to purchase the annuity.
Even if the client ultimately chooses not to take this option, consideration helps with understanding the implications of the annuity shaping choices made. There is a clear trade-off between higher income as long as your client lives versus certainty of return on death.
Value Protection – Provides the option for the customer to protect their hard-earned pension savings pot against early death and for a lump sum to be returned to a beneficiary.
It is often said that clients don’t choose annuities because their beneficiaries get nothing back when they die – this option can help address that concern, as long as the total income already paid doesn’t exceed the protected amount chosen.
So regardless of whether any of these death benefit options are chosen, it is really important to ensure proper consideration is given to the financial implications for those who would be left behind on the annuitant’s death. And wherever possible clients should be encouraged to involve their partner or family in discussions on finance and the choices around income in retirement.
Emma Watkins is managing director of retirement and longstanding at Scottish Widows