Purchased Life Annuity For Income (PLA)
There are generally two types of annuity - a life annuity and a pension annuity.
Investing for Income: This section deals with life insurance investment annuities which is known as a Purchased Life Annuity (PLA). Pension annuities are dealt with in pension annuities.
Factfile: Purchase Life Annuity
Lump sum investments: Yes
Regular premiums allowed: Generally - No
Flexible payments allowed (stop/start/additional/increase/decrease): No
Investment Risk Profiles Available:
Changing funds and risk profile allowed: No
Moving to another company allowed: No
Life Insurance Included: No
Personal Tax Benefits:
- Capital gains tax free
- No personal liability to income taxes investment element of 'income' payment
- Subject to taxes for the non-investment income element
Can be held inside Trust: No
- Adults Non Tax Payers
- Basic Rate
- Tax Payers
- High Rate Taxpayers
Insolvency Compensation Limits:
- Insurance Company Funds - 90% of total funds invested. No Limit.
- Company Pension Funds - 90% of total funds investment.
A purchase life annuity is generally purchased with a lump sum, although at least one type can be purchased by paying regular premiums. It is a contract made between the annuity provider and the person taking it out (called the annuitant) to pay an amount of money each year, or at intervals throughout the year, in return for the payment from the annuitant. Annuities can be set up to be paid monthly or annually in advance or arrears, with or without increases, spouses benefits and guarantees. The more features that are added on, the more expensive the annuity will be to buy. This section provides details of all the different annuity options you can consider.
The investor annuitant pays a single premium to the annuity provider.
The provider will then pay an amount each year to the annuitant, for as long as they live. This guarantees an income for life.
These are taken out for a set period of time.
The lump sum is paid by the annuitant and the annuity provider will pay an amount each year for a set period.
If the annuitant survives to the end of the period, annuity payments cease.
The investor annuitant pays a single premium to the annuity provider who guarantees to pay the annuity for a minimum period, even if the annuitant dies.
If the annuitant dies within the guarantee period (which is usually five or ten years) the balance of guaranteed payments will be paid to the annuitant's estate.
If the annuitant survives after the guaranteed period the annuity will continue to be paid for the rest of his/her lifetime.
These guarantee that the amount paid back in income will be at least equal to the lump sum paid to purchase the annuity.
If the investor annuitant dies before the amount of capital paid has been received back in income, the balance will be paid to their estate.
Escalating - Increasing Annuity.
By choosing this type of annuity, the income payments made to the annuitant by the annuity provider will increase each year.
Because of the increases, this type of annuity is more expensive than one where the payments stay level.
Annuity payments may increase by a fixed percentage each year or may move with increases in the Retail Prices Index.
This type of annuity can accept regular premiums because the annuity will not be paid until a certain point in the future.
If the annuitant dies before the annuity starts to be paid, it is usual for the provider to refund the premiums paid and may include some interest.
Once the annuity starts to be paid it will continue until the annuitant dies.
This is an annuity that continues to be paid for a specified period of time, whether or not the annuitant survives.
It will be paid for a set period.
Joint Life Purchased Life.
This type of annuity is taken out in joint names and will continue to be paid until the second person dies.
They can be set up to reduce by say a third on the first death.
We know that sometimes the different types of annuity products can seem confusing, but we are here to help. Book and speak to someone today.
Annuity Tax - Purchased Life Annuity Tax
How is the tax levied on a purchased life annuity given that you have invested money that you have earned or saved and is already taxed?
- The tax due on annuity income depends upon the type of annuity you have.
- Most of the annuities shown in this section are classed as purchased life annuities.
- Purchased Life Annuities are taxed partly at currently 20% and partly tax free.
- Some if the income your receive is a tax free element is deemed a return of capital
- Some of the income your receive is deemed a real income from the annuity and is taxable
- Pension Annuities are taxed in full at your highest rate of income tax as they are classed as earned income.
Purchased Life Annuities when moving Overseas
- In addition, depending upon the country that you live in for example if you live in Spain now rather than the UK
- Purchased life annuities and private contribution only pension annuities may be taxed differently in Spain to pension annuities where an employer has also paid in.