Guaranteed Period Annuity
A guaranteed period annuity works in a slightly different way to a standard annuity in that it guarantees to continue paying, even if you were to die, up to a fixed point in time.
Five and ten-year guaranteed annuities are the most common lengths of guaranteed period annuity, and mean that someone who dies two years into a ten-year fixed period annuity will die safe in the knowledge that their policy will continue paying out to their estate, until the end of the ten years.
Some people like to take out these policies as they don’t want to hand a huge lump sum to an insurance company, only to die the next week and have their families receive nothing.
Insurance companies offer these guaranteed annuities, but will pay a lower rate than for a conventional annuity, as they know they will definitely have to pay out for at least the fixed period.
In the circumstance that someone takes out a ten year annuity and lives for twenty more years, they will continue receiving the payment until they die, with the money only guaranteed to be left for family members for the first ten years.
Whilst these schemes are extremely effective, especially if you are caring for someone financially and want to make sure they are looked after if you were to die, they are subject to the usual rules on inheritance tax.
In the case of a consumer dying before the guaranteed period is up, insurance companies may offer to pay a lump sum, which will often be less than the payments would have been. They will argue this is because they have had less time to invest your money.
When deciding which sort of annuity to opt for, it is advisable to speak to an IFA (Independent Financial Advisor) who will be able to talk you through the different options.