Brought onto the market in the spring of 2006, Value protected annuities, (also called capital protected annuities) were designed to offer capital protection. This kind of annuity was created so as to provide a return of any unpaid income should the annuitant die before their 75th birthday.
However it should be recognised that in returning this income, it will be subjected to taxation at 35%. Value protected annuities are available in the form of single-life annuities or joint-life annuities.
Single First Life Protection
In the single example, an annuity fund of £100,000 could pay an income of £6,000 per year. After five years this totals £30,000. If that person dies, the remaining amount of the fund is £70,000. Tax is then deducted (35%) and the rest is then paid out -£45,500.
Joint First Life Value Protection
Under the joint example, the value protection would be paid if the annuity holder dies before their 75th birthday. In this instance the value protection is paid out regardless if the partner is dead or alive. If the partner is still alive the income of course would be paid to them.
Joint Second Life Value Protection
In this instance the value protection would be paid when both the spouse and the annuitant die, assuming they die before age 75. If the partner were to die before the annuitant, then the value protection money would be paid when the annuitant themselves dies. However if the annuity holder dies first, then the money is not paid until the death of the partner / spouse. In between this time, the partner would continue to get an income however. Payments to both the annuitant and the spouse will be deducted from the total lump sum payable.
One of the greatest drawbacks to value protection is that it must stop at the age of 75. So even if the annuity holder lives over 75, there is no lump sum that will be paid on their death. It is for this reason that value protection annuities are much more popular with younger annuity buyers. For example if you were aged 74 and you went for value protection, the amount you would gain should die before you were 75 would be very significant. However were you to pass away at 75 there would be no benefit payable at all.
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