What happens to an annuity when you die?

An annuity can provide financial security throughout your retirement – but can it offer the same protection for your loved ones after you’ve gone?

While it’s not easy thinking about death, knowing what happens to your annuity when you die can give you peace of mind.

In this article, we’ll explain how your annuity can continue supporting your family, and the tax implications you should know about.

How do annuities work at death?

What happens to your annuity when you die depends on the type of annuity you have and the terms you agreed with your provider.

By default, annuity payments will stop when you die. However, you can add a feature called ‘death benefits’ when you set your annuity up. These features help ensure your loved ones (beneficiaries) are financially protected.

What are death benefits?

Death benefits are payments that your chosen beneficiaries will receive after you die. These payments can take the form of a regular income or a lump sum.

When you buy a Canada Life annuity, you can choose from a range of death benefits to suit you and your loved ones:

• Joint Life option
  You can add a spouse or partner to your plan so they'll continue to receive income when you die. You can choose whether these payments are the same as the amount paid to you, or a percentage of that amount.
• Annuity protection
  Your loved ones could receive a lump sum when you die. You can choose how much the lump sum should be, up to 100% of your original premium, minus whatever income you’ve already received.
• Guaranteed payment periods
  You can guarantee your income for a set period. If you die during this time, your income will continue to be paid to your chosen beneficiary until the end of the period.

These death benefits are available with our Lifetime Annuity and Purchased Life Annuity. 

Our Fixed Term Income Plan works slightly differently. When you buy the plan, you can request a death benefit, either as income or a lump sum, for your chosen beneficiary.

Does a beneficiary pay taxes on an annuity?

As HMRC treats annuity payments as ‘earned income’, they can be subject to income tax. Whether your beneficiaries need to pay income tax on annuity payments depends on how old you are when you die.

• If you die before age 75, your beneficiaries will not pay income tax on annuity payments.
• If you die age 75 or above, your beneficiaries will pay income tax on annuity payments at their marginal rate*.

*Marginal rate is the tax you pay on the next pound of income you earn.

Find out more about tax on annuities.

Inheritance tax

If you bought an annuity using your pension pot, your beneficiaries should not need to pay inheritance tax (IHT) on any death benefits they receive. This is because your pension sits outside of your estate, under current UK law. 

However there are some exceptions:

• Purchased Life Annuity
  If you die during the guarantee period, any remaining guaranteed payments can be paid into your estate or straight to your beneficiary. Money paid into your estate may be charged inheritance tax whereas money paid straight to a beneficiary should not be eligible for inheritance tax. If you have a joint life policy with Premium Protection, any lump sum paid into your estate after both of you die will also count as part of your estate and may be charged inheritance tax.
• Fixed Term Income Plan
  If at the time of transferring an existing pension into this plan, you know that you are in serious ill health, should you then die within two years of the transfer this amount could become liable to inheritance tax. 

Learn more about the current inheritance tax rules on private pensions on gov.uk.

Inheritance tax rules are set to change from April 2027

Planned changes to inheritance tax mean anyone who benefits from your annuity if you die might have to pay inheritance tax on any money they receive, whether your annuity was purchased with a pension or with savings.

This means that, unless any death benefits go to your spouse, civil partner or a charity, your estate may have to pay inheritance tax at 40% on anything above the available inheritance tax allowances. Based on current thresholds, most people can pass on up to £325,000 free of inheritance tax.

If you are passing on your main home to your children or grandchildren, the residence nil rate band could add up to £175,000 to this allowance. This means that, in total, you may be able to pass on up to £500,000 before inheritance tax is due on your estate.

Act now to review your plans

Because the rules are changing soon, it is important to speak to a financial adviser urgently, so you understand how you and your loved ones could be affected and have time to make any changes you need.

Learn more about annuities 

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