The Association of British Insurers (ABI) has proposed a new annuity scheme which would allow insurers to pay a refund in the event of early death.

The ABI said a survey it had conducted showing that nearly half of retired people would be interested in buying a money-back guaranteed annuity demonstrated that there is strong demand for such a product.

It addresses the main concern that many people have about annuities - that their money dies with them

Joanne Segars of the ABI

Under the ABI proposal, an insurer would pay out any of the capital not paid out to the customer during their retirement on their death.

People who have a money purchase or defined contribution pension scheme must purchase an annuity by the time they reach 75.

But while annuities guarantee an income for life, their relatives can not inherit any money from their investment when they die.

Existing options

The ABI believes that guaranteed money-back annuities would be more straightforward and attractive than the current ten-year guaranteed annuity.

With this type of annuity, the company continues to pay a monthly income to their customer's estate for the rest of the ten-year term instead of a lump sum paid on death.

Joanne Segars, head of Pensions at the ABI said: "The concept of a money-back guarantee has been widely supported by many industry experts.

"But this research is the first definitive evidence from customers that there is an appetite for this product. This is because it addresses the main concern that many people have about annuities - that their money dies with them."

Support for scheme

A drawback of the money-back guarantee annuity is that it would reduce the level of annual income.

One in five of those surveyed, however, said they would be willing to give up 20% of their annuity income in exchange for a money-back guarantee, or for the option to change annuity type at some point in the future.

A third of respondents wanted to receive more advice and information about annuity products, but few were willing to give up any income in exchange for more guidance.

The ABI has proposed the idea of a guaranteed money-back annuity as part of an ongoing Inland Revenue review of the annuities market.