With annuity rates under pressure and investors increasingly keen to protect the value of their annuity in the event of early death, flexible retirement solutions provider LV= is highlighting the risk of paying unnecessary inheritance tax (IHT) on annuities.
Many annuities include five- or 10-year income guarantees to protect their value in case the holder dies early. Despite any payments made under these guarantees being taxed as income, they are often subject to a further charge to IHT.
Unless payments are made at the annuity provider's discretion, it is likely that the value of the guarantee payments will fall under the annuitant's estate for inheritance tax purposes.
To ensure that you are not faced with a necessary tax bill, check who the annuity provider will make the income payable to.
In the case of someone with a guaranteed annuity dying before the guarantee ends, extra inheritance tax charges could be a nasty surprise that the family of the annuitant do not need. Using the example of a male aged 65 buying an annuity now with a 10-year guarantee and receiving an income of around £7,000 per annum, the IHT payable could be £8,780 if the annuitant died after five years and the payments were not made at the provider's discretion.
Further complications can arise from income payments being made directly to an annuitant's estate, because it prevents the estate from being wound up until the end of the guarantee period. It can also cause cash flow problems, as the full value of the IHT charge must be met at outset.
