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.
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. How the balance of the guarantee period is paid depends on the type of pension scheme.
For personal pension, the balance of the guarantee period is always paid in the form of continued income, whereas with company schemes the balance can be paid in one of three ways. Continued income, undiscounted lump sum and discounted lump sum. Where the guarantee is more than 5 years the balance must be paid as continued income.
For company schemes where there is a spouse's pension and a guarantee of less than 5 years, the spouse's pension may start immediately after the member's death, or at the end of the guarantee period. The former is called with overlap, i.e. the balance of the guaranteed period is paid out a lump sum and the spouse's pension commences immediately. The later is called without overplay and the balance of the guarantee is paid as income with the spouse's pension starting at the end of the guarantee period.
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).