Do you require an extra Income?
What is a Purchase Life Annuity? A Purchased Life Annuity uses your cash lump sum to provide a guaranteed gross income throughout your lifetime or over a period of your choice. You should be aware that at the end of the term selected or when you die, there will be no return of your cash lump sum from a Purchase Life Annuity. In addition, once you have purchased your annuity you cannot alter it, or cash it in. A Purchased Life Annuity can be bought by any person above the age of 50 and can be set up as follows: |
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- Single Life
- Joint Life Last Survivor, when payments will continue after the death of the first annuitant and only stop on the death of the second annuitant.
Please note that income from a joint Purchase Life Annuity is usually less than for a single life. Income can be paid either on a monthly or annual basis, in arrears.
A Purchased Life Annuity can provide a guaranteed income, which will remain unaffected by changes in interest rates. In addition, the income that you will receive will usually be greater than that available from savings accounts at Banks and Building Societies, although your capital is retained with the latter investment.
So if you have a lump sum available from:
- An inheritance
- A tax-free cash sum from a pension fund
- A redundancy payment
- The sale of a house
- A maturing life policy
- Investment encashment
and wish to maximise your income, you should consider a Purchased Life Annuity.
Will I have to pay tax on my Purchase Life annuity payments?
The gross income payments from a Purchased Life Annuity are regarded for tax purposes as being made up of two separate parts - a capital amount and a taxable amount.
The capital amount of a Purchase Life Annuity income payment is set by Inland Revenue rules. This part is regarded as the return of capital and is not taxed. As a result, you will receive the full amount gross of tax.
The taxable amount of a Purchase Life Annuity is regarded as investment income. This interest part of the annuity payment is normally paid by the annuity provider net of savings rate tax. If you are a higher rate taxpayer, you will be liable to pay additional tax direct to the Inland Revenue. If you pay starting rate tax, you may be able to reclaim part of the tax deducted.
To ensure that a part of your Purchase Life Annuity income payment is regarded as return of capital, you should complete the Inland Revenue form PLA1 supplied to you when you complete your Purchase Life Annuity application.
If you are a non-taxpayer you should complete Inland Revenue form R89, or R86 for joint purchasers, to ensure that you are able to get your annuity income gross.
| Purchase Life Annuity | gross income |
| Conventional Annuity ( Single Life) | £7,105 pa |
Purchase Life Annuity ( Single Life) |
£6,790 pa |
The annuity rate shown above is based on a purchase price of £100,000 with No guarantees and No escalation for a Male aged 65, and should be used as a guide only. The actual rate you will receive will be specific to your own circumstances, and dependent upon the additional features you require to be added.
Although a Conventional Annuity will give you a higher Income than a Purchase Life Annuity ( as seen above) you must take into account that all the income from a Conventional Annuity will be taxable, meanwhile only part of the income from the Purchase Life Annuity will be taxable.
Once this has been taken into account the actual income you receive after tax, will be greater from the Purchase Life Annuity.
Questions & Answers
Can I invest money that's not from a pension scheme?
Yes, you can invest any lump sum. For example, the money from the sale of a house, an inheritance, an unexpected windfall, or a maturing life policy. You can also use your tax-free lump sum from your pension fund to buy a Purchase Life Annuity.
What happens to my Purchase Life Annuity if I die?
The payments will stop unless:
- you have chosen a guaranteed period, in which case payments will be made until the end of the guaranteed period;
- you have a joint life, second death plan, in which case payments will continue until the second life dies; or
- If you have selected a Capital protected Purchase Life Annuity, and have not received payments equal to the amount you originally invested, you will receive a return of the balance if you die during the term of the plan.
What effect will inflation have on my Purchase Life Annuity?
Inflation can reduce the value of your Purchase Life Annuity Income over time.
To protect against the effects of inflation, you can choose to have your Purchase Life Annuity income payments increase automatically each year in line with inflation, or at a fixed rate of up to and including 8.5%.
Your starting income from your Purchase Life Annuity may be lower should you choose either of these options.
Is my Purchase Life Annuity money guaranteed?
Your regular income, including any increases you have selected, is guaranteed until you die or until the end of any limited period you have chosen.
If you have chosen a guaranteed period, your income will be paid until the end of this period, even if you die earlier. If you have selected a joint Purchase life annuity, an income will be paid until the first death, second death or a named person dies, depending on the option chosen.
Your starting Purchase Life Annuity income may be lower should you choose any of these options.
