For UK financial advice professionals only, not approved for use by retail customers. Click here for the customer website.

Death benefits and annuities

Last Updated: 6 Oct 22 13 min read

Learn about the death benefits that can be provided if a member dies after buying an annuity contract, and the resulting taxes payable.

Key Points

  • If death benefits haven’t been purchased by the annuitant at outset, then nothing is payable when they die.
  • If purchased, annuity death benefits can include guaranteed periods, joint life/nominee annuities and value protection.
  • Joint life, nominee or successor’s annuities, annuity protection lump sums and ongoing income payments due under a guarantee period are tax-free income if the original annuitant was under 75 when they died.
  • Joint life, nominee or successor’s annuities, annuity protection lump sums and income due under a guarantee period are taxed at the marginal rate of the recipient if the original annuitant was 75 or over when they died.
  • Payments under a guarantee period may be subject to inheritance tax.

Choices and cost

Inclusion of death benefits was a choice the annuitant made at the point the annuity was purchased, and came at a cost. That cost will be reflected in the amount of annuity paid to the annuitant – the more death benefits that are included, the lower the starting annuity will be. That's because the liability and risk to the annuity provider increases where death benefits are included. So assuming the same purchase price, the amount of annuity that includes provision for a survivor’s annuity will be less than one that does not include such provision.

Where no annuity death benefits are built in to the annuity at the point of purchase, all payments cease on the death of the annuitant, and there is no lump sum or return of capital.

Annuity death benefits that can be included in an annuity fall into a number of main categories:

  • Guaranteed periods

  • Joint life annuity

  • Nominee annuity

  • Value protection

It is possible to provide both dependant / joint life annuities and guaranteed periods under the same lifetime annuity at the point of purchase.

Guaranteed periods

A guaranteed period is a minimum period of time for which an annuity will be paid, irrespective of how long the individual lives. Previously this guarantee period was limited to 10 years (from the date the annuity was purchased – not from the date of death) but for new annuities bought since April 2015 this is no longer the case.

For example, Bessie chose a lifetime annuity, £8,000 gross a year, paid in monthly instalments, with a guaranteed period of 10 years (even though she may have been able to get a longer guarantee period than this following the legislation changes in 2015). She dies after four years. The guaranteed period means that monthly annuity payments will continue for another six years.

A survivor’s annuity (set up following death) cannot have a guarantee period.

Section 165(1) ‘Pension rule 2’ and paragraph 3(1)(c) and (2) Schedule 28 Finance Act 2004

Joint life annuities

From 6 April 2015 legislation allows new joint life annuities to be passed on to any beneficiary. However, this will impact on the annuity purchase rate and requires the annuity provider to agree to offer this (so allowed for in the annuity terms).  However, providers may not be prepared to offer this because of the extra risk involved.

On the death of an annuitant, a joint life annuity will continue to be paid to the survivor for the rest of the survivor’s lifetime – and the survivor doesn't need to be a dependant. However, the annuity provider may restrict this, say to a named beneficiary. If the member chooses a joint life annuity with, say, a grandchild, the annuity payments are likely to be paid for much longer than if the joint annuitant is in the same age group as the annuitant. So the initial starting annuity would be much lower.

A joint annuity can continue to be paid at any rate up to 100% of the annuity payable to the annuitant. The level that would be paid to the survivor will be set out in the annuity policy terms and, again, is reflected in the cost of buying the annuity.

However, there are a couple of exceptions:

  • investment-linked annuities payable to a survivor can subsequently increase, because of investment performance, to an amount higher than was payable to the annuitant.

  • If there is "overlap" which is detailed below.

With overlap / without overlap

Where the annuity doesn't include "overlap", the survivor's annuity won’t start until the end of the guaranteed period if the annuitant dies during the guaranteed period.

Where the annuity includes "overlap", the survivor's annuity will start immediately on the annuitant's death, even where the annuitant dies during the guaranteed period meaning that:

  • payments of the deceased’s annuity continue to the end of the guarantee period and

  • the survivor's annuity is paid in addition until the end of the guarantee period (and continues thereafter, until the survivor's death).

A joint life annuity is not tested against lifetime allowance when the payments go to the 'second life' (that is, not retested on the first annuitant’s death).


Natasha has a level annuity of £15,000 gross pa, payable monthly, including a 10-year guaranteed period and a survivor's annuity for her husband, Pierre, equal to 50% of the annuity payable to her and set up without overlap. She dies after six years. The amounts payable will be:

  • £15,000 gross pa for the remaining four years of the guaranteed period (payable in accordance with her will – this may or may not mean that Pierre will receive those four years' payments)

  • £7,500 gross pa payable to Pierre thereafter (from the end of the guaranteed period) until Pierre dies.

If Natasha had chosen the same annuity but with overlap then Pierre would start to receive £7,500 gross pa immediately, without having to wait four years for it to start. At the same time, £15,000 gross would be payable as the remaining instalments of the guaranteed period – so a total of £22,500 for the four years until the end of the guaranteed period.

Trivial commutation lump sum death benefit

In some cases, the sum left to pay a joint annuitant would provide only a small (trivial) pension income. Where the joint annuity meets a triviality measure on the first annuitant's death, it's possible, subject to scheme rules, to pay out the value of the annuity as a lump sum to the survivor.

In this case, the value of the income stream would be actuarially valued, and a lump sum could be paid up to the limit of £30,000 (gross).

Beware the income tax treatment of this type of payment which is covered later.

Paragraph 20 Schedule 29 Finance Act 2004

Nominee annuities

The terms of the nominee annuity are agreed at the point the member’s annuity was purchased. This was introduced by pensions flexibility, as long as the member died on or after 3 December 2014 and the nominee becomes entitled to the annuity on or after 6 April 2015. This is where the member can nominate anyone (not limited to a dependant) to receive an ongoing annuity on the death of the member (although this would be subject to agreement by the provider). The difference from joint annuities is that the nominee's annuity isn’t a continuation of the member's annuity, but a stand-alone annuity with its own terms and conditions, payable on the death of the member.

An annuity payable to a nominee is a nominee's annuity if:

a)    either:

  1. it's purchased together with a lifetime annuity payable to the member and the member becomes entitled to that lifetime annuity on or after 6 April 2015, or
  2. it's purchased after the member's death, the member died on or after 3 December 2014 and the nominee becomes entitled to the annuity on or after 6 April 2015,

b)    it's payable by an insurance company, and

c)    it's payable until the nominee's death or until the earliest of the nominee's marrying, entering into a civil partnership or dying.

The member would select at the point of purchase if they wanted the annuity to continue to the death of the nominee, or the earliest of the nominee remarrying (or entering a civil partnership) or death.

An uncrystallised funds lump sum death benefit can’t be paid from funds that have been used to purchase a nominee's annuity.

Section 167(1) Finance Act 2004 - pension rules 3, 3A and 3B

Paragraphs 17, 27AA and 27FA Schedule 28 and paragraph 3(4A) Schedule 29 Finance Act 2004

Value protection

Value protection allows a lump sum (after tax if applicable) to be paid on the death of the annuitant. Value protection is available both for scheme pensions and lifetime annuities. The legislative term for value protection is 'annuity protection lump sum death benefit' for lifetime annuities and "pensions protection lump sum death benefit' for scheme pensions, although both generally known as 'value protection'. Value protection may not be provided in combination with any other death benefit.

The maximum amount (before tax) that can be paid under value protection is:

Annuity purchase price minus the total amount of the annuity payments to date of death (ignoring any tax deducted on the annuity payments).


Derek purchased a value protected annuity with his £100,000 pension fund at retirement. His annuity payment is £5,500 per annum. Unfortunately, Derek died five and a half years later. How much will be paid by the annuity provider to his estate following his death?

Purchase price = £100,000
Gross annuity paid to date of death = (£5,500 / 12) x 66 monthly instalments = £30,250
Maximum value protection = £69,750
The lump sum payment is taxed depending on the member’s age when they died – see later.

Paragraph 16 Schedule 29 Finance Act 2004

Successor’s annuities

In addition to the joint and nominee’s annuities detailed above, there is a third form of annuity which can be paid after the death of a member's initial beneficiary. This is called a successor's annuity. A successor's annuity is purchased from the crystallised funds within a drawdown pension (that is funds not already used to provide a dependant’s or nominee’s annuity). For the avoidance of doubt, a successor's annuity is not the continuation of a dependant or nominee’s annuity (which both cease on the death of the joint annuitant, or nominee – unless within any guaranteed period attached to the original member’s annuity).

An annuity payable to a successor is a successor's annuity if:

  • the successor becomes entitled to it on or after 6 April 2015,

  • it is payable by an insurance company,

  • it is payable until the successor's death or until the earliest of the successor's marrying, entering into a civil partnership or dying,

  • it is purchased after the death of a dependant, nominee or successor of the member (the beneficiary),

  • it is purchased using undrawn funds, and

  • the beneficiary dies on or after 3 December 2014.

For the purposes of an arrangement after the beneficiary's death, the funds within the following are classed as undrawn funds if, immediately before the beneficiary's death, they were held within:

  • dependant's capped/flexi-access drawdown fund,

  • nominee's flexi-access drawdown fund,

  • successor's flexi-access drawdown fund

Taxation of annuity payments

Income tax

Continued regular annuity payments to a joint annuitant or nominee and payments for the remainder of a guaranteed term, are taxed in line with the tax treatment for drawdown contracts. Since 6 April 2015, the income tax treatment is the same for annuities and drawdown. This is irrespective if they are paid as an income or a lump sum (excluding trivial commutation lump sum death benefit, covered later).

What this means is, from April 2016, the death benefits on annuities are taxed as follows:

Payment Type

Age of The Annutant At Death


Lump sum – Annuity protection / capital protected annuity Death before age 75 Tax-free
Death from age 75 onwards Taxable at marginal income tax rate of the recipient
Income – income from guaranteed payments or joint life / nominee's / successor's annuities. Death before age 75 Tax Free**
Death from age 75 onwards Taxable at marginal income tax rate of the recipient
**Income death benefits from pre-age 75 unused uncrystallised funds must be settled (ie used to buy annuity or designated to drawdown) within two years or they become subject to income tax.

Sections 579A to 579D, 646B, 646C and 683 Income Tax (Earnings and Pensions) Act 2003

Where instalments continue under a guaranteed period on the death of the annuitant:

  • Annuitant dies before age 75 –paid tax-free to the deceased person’s estate, from which it is distributed to beneficiaries as per deceased persons will / intestacy etc.
  • Annuitant dies post age 75 – A guaranteed annuity is paid to the estate of the annuitant. Prior to distribution to the beneficiaries under the deceased's will/the laws of intestacy, income tax is deducted at the personal representatives' rate of tax, which is basic rate. When the annuity is subsequently paid to the beneficiary, it will be classed as "basic rate of tax paid" and will only be liable to further income tax if the beneficiary is a higher or additional rate tax-payer.

If the capital value of the joint annuity is under £30,000, under trivial commutation lump sum death benefits rules, the benefits can be paid as a lump sum. All triviality payments are taxable in the hands of the recipient. The annuitant’s age at death is irrelevant. The payment of a trivial commutation lump sum death benefit doesn't have any entitlement to a tax-free element, unlike a trivial commutation benefit paid to a member.

Inheritance tax

If a guaranteed period (or value protection) is selected there may be an IHT impact. Where the:

  • recipient(s) of any outstanding payments (or lump sum) are selected under discretionary powers then there is no IHT impact.

  • person(s) entitled to the money are determined in accordance with the deceased’s will or the laws of intestacy (whichever is appropriate) there is potentially an IHT liability.

If  there was the potential for IHT but payments go to the annuitant's surviving spouse / civil partner, then no IHT will actually be payable as these transfers are exempt from IHT.

The value of a guaranteed annuity for IHT is not simply the amount of the outstanding instalments. It is the current open market value of those instalments – in effect, what someone would pay now for the income stream up to the end of the remaining guaranteed period.

For example, £15,000 pa is due for another six years under the remaining guaranteed instalments arising on the death of the annuitant. The total of those instalments, over the whole six-year period, is therefore £90,000.

But HMRC allow an actuarial value of the payments due until the end of the guarantee period to be used. For example, the current value of £15,000 pa income for six years might be in the region of say £60,000.

It's for the executors of the estate to agree with HMRC the value to be included for IHT purposes. To assist, HMRC provides a guaranteed annuity discount calculator. This can be used to provide an indication of the open market value of guaranteed annuity instalments. However, it doesn’t provide calculations for investment-linked annuities – these would need to be calculated individually on a case-by-case basis.

For value protection payments, it would simply be the value of the lump sum paid that is taken into consideration.

As stated earlier, the above applies to annuities that have no discretion. If the death benefits are payable at the trustees discretion then IHT should not apply.

Transfer of dependant's annuity after benefit crystallisation event

Regulations provide for the transfer of sums / assets by registered pension schemes and insurance companies, where those sums / assets represent pensions in payment.

Where a dependant’s annuity is reduced or stopped due to a transfer of sums / assets and a new dependant's annuity is not payable in relation to the transferred amounts, the value of the transfer is classed as an unauthorised payment made by the original (rather than receiving) registered pension scheme. The same is true in relation to a dependant's short-term annuity.

The Registered Pension Schemes (Transfer of Sums and Assets) Regulations 2006/499

Annuity contracts purchased before 6 April 2006

An annuity contract purchased before 6 April 2006 and in payment at that date is not a registered pension scheme. As such, any pension death benefit provided by the contract will reflect the dependency rules in force up to 5 April 2006.

Tech Matters


Ask an expert

Submit your details and your question and one of your Account Managers will be in touch.

Submit a question

Find us on LinkedIn

Sign up below where you will be the first to see any news, views or support we think matters. 

Sign up