A purchased life annuity is a plan that provides you with an income for life or for a fixed stated period in return for a single lump sum payment. The income you receive is dependent on annuity rates and is regarded as being a repayment of the capital sum plus interest on that sum. With this type of annuity, you pay tax only on the portion that is regarded as interest.
The minimum purchase is £5,000 with a maximum of £250,000, and you must also be a UK citizen. Your employer can also pay into a purchased life annuity. The benefits to you include:
• You have a guarantee income for the term agree or for life.
• You can include your dependants in your agreement.
• You can be paid monthly, quarterly or annually - or half-yearly if you prefer.
• Most insurance companies include the charges for the plan in the annuity rate.
• You can purchase this income with a lump sum of cash when you retire.
A purchased life annuity offers you a number of options:
• You can opt to have your annuity increase each year up to 8.5%
• Your annuity can be paid on a single life, first death or last death. So your guaranteed payments can be paid until either until a named person dies, until you or your spouse dies, or to your surviving spouse until he or she dies.
• You can choose a fixed term for the plan to run - the shorter the term the more the payments.
You will be taxed only on the interest accrued on your initial investment. This will be taken at source by the insurance company, and any overpaid tax can be claimed from the Inland Revenue.
What Are the Age Restrictions?
If you have reached the minimum allowable retirement age of 55 and are under 80 years of ageand you have a large sum of cash to pay in return for a guarantee income for life, then you will benefit from this type of annuity.
The age limit is before you reach 80. Once you reach your 80th birthday, this option is not open to you although you must buy any regular annuity before you reach 77. Thus, if you retire between 55 and 77, and take your allowed 25% of your pension pot as a lump sum, you can use this to buy a purchased life annuity and so improve your regular pension. If you have your lump sum invested, you have until you reach a day before your 80th birthday to use it to purchase a life annuity.
While the income from purchased life annuities is less than from the compulsory annuity that you must take when you retire, the taxation level is lower than you would pay for a regular annuity. If you want to make the best use of your pension fund, you should use the 25% interest-free lump sum to purchase this type of annuity and so make the best use of your fund. You should always “compare annuities” to find the best annuity rates.
Purchased Life Annuity Rates
Your net income should be greater than if you used the entire fund for a regular annuity. Purchased life annuity rates are generally favorable in comparison to those of normal annuities due to the tax situation. In fact, the income from such an annuity can be anything up to 30% higher that a building society or bank would offer. The income is guarantee for life and is regarded as a return of capital where tax is concerned.
Rather than choose a guaranteed period, you can elect for capital protection. This ensures that payments would be made for up to 5-10 years into your estate even in the event of you dying during that period. That payment would be the difference between the pre-tax income you had received until death and the original capital you had used to buy the purchased life annuity.
So, if you had paid in £30,000 for the annuity, and had been paid only £14,000 gross, your estate would be paid £16,000. You can choose either this form of capital protection, a guaranteed payment period or dependent’s income to ensure your spouse or family receives a payment on your early death.
Why Choose a Purchased Life Annuity?
There are specific circumstances in which this type of annuity would be beneficial. These include:
• You believe you may die young due to your lifestyle.
• You want to maximize your pension and make best use of current tax laws.
• You have a private fund of cash and want to use that to maximize your pension and provide a guarantee income for life.
• You want to make best use of the 25% tax-free lump sum you can take from your pension fund.
If you believe that a purchased life annuity would suit you, you should first seek the advice of an independent financial advisor. Annuities can be complex and you must make certain that your choice is the most suitable for your personal circumstances.
