Income can be paid for a minimum period of time

Most annuities are guaranteed to be paid for a certain period. This means that if you die soon after purchasing an annuity your family will still receive some income.

If you bought an annuity without a guarantee period, and died the day after, your income would stop, your partner would get nothing or a reduced amount it was a joint life annuity and the insurance company would make a huge profit.

To protect against this unlikely event you can guarantee that your annuity will be paid for at least a minimum period. If you select a 5 year guarantee (this is the norm) and died after 2 years, your family would continue receiving an income for the next 3 years. If you had chosen a 10 year guarantee, the payments would continue for another 8 years.

Comparing the options

£ 100,000 purchase, male aged 65, female aged 65, level payments.

The technicalities of guarantee periods

Most annuities have a guaranteed period of 5 years, which means that if the annuitant dies after say 2 years, the balance of the guarantee period, that is 3 years will be paid as continued income payments.

The balance of the guarantee period is always paid in the form of continued income to your nominated benificiary, normally your spouse.

Where there is a spouse's pension and a guarantee, the spouse's pension may start immediately after the death of the 1st annuitant, or at the end of the guarantee period. The former is called with overlap and the later is called without overlap.

The balance of any guarantee period is tax-free as it is paid under the terms of a discretionary trust.

Under the proposed new simplification rules, the maximum guarantee period for annuities will remain at 10 years but the benefit must be paid as income because there is no lump sum option (even the guarantee period is 5 years).