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   Purchased life annuity
  Purchased Life Annuity   "Use a lump sum to provide a guaranteed income for life"

The net income from a purchased life annuity can be up to 30% higher than a bank or building society due to the lower tax charge. The majority of the income is deemed a return of capital and this increases with age, the income will not fluctuate as with bank interest and is guaranteed for the whole of your life.
  Who benefits   Income comparison   Capital protection
  Annuity rates   Capital and interest   Added features
  Tax treatment   Inheritance tax planning   

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Who benefits
Anyone that is typically aged 55 or over, has a large lump sum and want a guaranteed income for the rest of their life can benefit from purchased life annuities. Most providers set a minimum lump sum of £20,000 (or even higher) so often an individual will only be in this position when they retire and commute part of their pension fund to a tax free lump sum. They may also have been the beneficiaries of a will and have inherited a property that is later sold, and now they want to supplement their income.

The purchased life annuities market is not as developed as the compulsory purchase annuity (pension annuity) market so the income from the same size of lump sum is less, usually between 80% and 90% of the pension income. Also the insurance companies believe that because there is no compulsion to buy a purchased life annuity, as there is with a pension annuity, they are going to be selected against. In other words, only healthy people would buy purchased life annuities and therefore this will reduce the mortality profit in this market and therefore reduces the rates offered.

Despite this lower income, the annuity taxation of a purchased life annuity is very favourable compared to pension annuities and it provides a higher income net of tax. This means that the majority of individuals on retirement that want to maximise their pension income should commute the maximum tax free lump sum and use this for a purchased life annuity.

Added features
A purchased life annuity can have many of the added features of pension annuities such as a guaranteed period, being paid in advance or arrears, with proportion, single or joint life annuities or level or escalating.

Usually if the purchased life annuity is escalating, this is not offered for RPI escalation but on a fixed rate escalation basis only, typically at 3%, 5% up to a maximum of 8% escalation. The annuity can have a dependents income that operates on the same basis as a survivors pension, this being an income paid to a spouse at 50%, 66% or 100% of the annuitants income.

Capital protection

This feature is unique to a purchased life annuities. Capital protection can be selected rather than a guaranteed period. A guaranteed period would continue to make payments up to 5 or 10 years after the annuity was purchased even it the annuitant dies.

Capital protection ensures that if the annuitant dies earlier than expected, the difference between the gross income received and the original capital to purchase the annuity will be paid as a lump sum to the annuitant's estate.

To provide income after the death of the annuitant, he or she can therefore choose between a dependents income, capital protection or a guaranteed period, all with different levels of protection and associated costs.

annuity rates table
These rates tables are for purchased life annuitants. For other rates try;

standard single rates smoker single rates
standard joint rates smoker joint rates
diabetes annuity rates with profits annuity rates
impaired life rates immediate needs rates
   Purchased life rates - SINGLE & JOINT life

The following tables show the best income that can be use to buy a purchased life annuity from a lump sum of £100,000. The annuity is paid gross in arrears and does not include a guaranteed period for the income shown. It assumes the annuitant purchases the annuity for the ages from 60 to 85. A comparison has been made for a single life, level annuity on a single life and joint life with 100% dependents income basis. No enhanced annuity rates are included, where the annuitant suffers from ill health, is a smoker or is overweight.

Last reviewed: August 2023

Level Annuity, Single Life
Unisex rates (men and women)
  Age 60 £5,819  
  Age 65 £6,484  
  Age 70 £7,440  
  Age 75 £8,912  
  Age 80 £11,068  
  Age 85 £14,465  
  Age 90 £18,198  
Level Annuity, 100% Joint Life
Male + Female 100% joint rates
  male 60 and female 60 £5,230  
  male 65 and female 65
  male 70 and female 70
  male 75 and female 75
The above are examples of the rates available. Click the following for the full lump sum tables and other annuity options.
Best Annuity Rates

The above table can be compared to the retirement income from pension annuities or see annuity rates. This is only important where the annuitant wants to maximse the income from a pension fund and must decide whether to commute the tax free lump sum and to invest in purchased life annuities, or use the money and take more pension income. A comparison of annuity taxation shows the best option for a basic rate taxpayer.

Capital and interest
The income paid under purchased life annuities contains a capital and an income element. The capital element is treated as a return of the annuitant's original investment and is tax free. The income element is taxed as savings income at a 20% rate of tax for basic rate taxpayers. Higher rate taxpayers will pay a further 20% tax.

The amount of capital paid depends on the age and sex of the annuitant as well as the other benefits attached to the annuity such as a guaranteed period and if there is any proportion added. The following table shows the tax free capital paid for ages between 55 and 85, for male and female annuitants assuming the level income is paid monthly in arrears, with no guaranteed period, without proportion and a 50% dependents income as a joint life annuity.

Tax free capital per £1,000 income
Age Now Male Female Joint
55 692 677 679
60 713 685 686
65 832 770 782
70 852 827 830
75 908 831 841
80 940 833 873
85 971 835 897
Annuity table - the annuity rate shown above for capital value is based on specific ages and should be used as a guide only. For an annuity rate specific to your circumstances you should complete the free annuity quote.

The above table shows that the older the annuitant is when acquiring a purchased life annuity, the higher the capital element and as a result, the lower the tax liability on the income. For example, a male basic rate taxpayer aged 70 will pay tax on £148 per £1,000 of income compared to a 60 year old that will pay tax on £287 per £1,000.

Tax treatment
Under section 656 of the Income and Corporation Taxes Act 1988 (ICTA) part of the income from purchase life annuities is regarded as a return of capital that is free of tax but the interest element will be taxable.

This means the tax treatment of a purchased life annuity is very favourable when compared to other types of investments including pension annuities. The tax paid depends on the proportion of capital and income paid to the annuitant and insurance companies have agreed these proportions with the HM Revenue & Customs (HMRC).

For example, you are aged 75 and buy a purchased life annuity with £100,000 as a level annuity, no guarantee, without proportion and paid monthly in arrears. If the income you receive is £6,900 pa gross of which £6,900 pa is deemed as return of capital and paid tax free.

Should tax be liable on the income it would be calculated as follows. For example, say for an income of £12,000 pa the provider calculated £11,000 pa as capital and tax free. The balance of £1,000 pa is treated as income and the provider must deduct tax at your marginal rate.

If you are a basic rate taxpayer, 20% is deducted from the income element or £200 pa and pay this to HM Revenue & Customs. This means the annuitant is left with £11,800 pa, with no further tax to pay resulting in an effective tax rate of 1.67%. This compares very favourably with the 20% basic tax rate payable on a pension annuity.

Income comparison
Many retired people have money in bank or building society accounts that they rely in part to provide them an income. They do not want the risk of equity exposure but need a reliable income from their savings. They may also have received money or a property from an inheritance and now want the best possible return with the minimum of risk.

The following table compares the gross and net income paid from a £100,000 investment in a bank or building society account and purchased life annuity. The interest on the bank instant access bank account is assumed to be 3.5% gross or 3.0% net with £1,000 pa interest rate allowance. The life annuity assumes a level annuity, paid monthly in arrears, without proportion, no guarantee and no dependents income for the single life options but a 100% dependents income for the joint life option.

Comparison of income from £100,000
Gross Net
  Bank or Building Society
£3,500 £3,000
  Life annuity, male or female 75
  Life annuity, 100% joint 75
Annuity table - the annuity rate shown above for capital value is based on specific ages and should be used as a guide only. For an annuity rate specific to your circumstances you should complete the free annuity quote.

Assuming the annuitant does not require the capital, then a purchased life annuity for a male or female on a single life basis aged 75 provides an income where HMRC deem the majority is a return of capital. Therefore after basic rate tax the amount is £8,682 pa which is £6,082 pa greater than from a bank or a building society, guaranteed for the life of the annuitant.

At retirement the individual can use a pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity, taking a tax free lump sum that can also be used to buy a purchased life annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.

Inheritance tax planning
The individual could use purchased life annuities to reduce a future inheritance tax (IHT) liability. In buying a purchased life annuity any amounts in excess of the nil rate band, £325,000 for the tax year 2009/10, removes capital from the estate. If on first death the nil rate band is not used, 100% of this can be transferred and used on the second death. Therefore in the above example the nil rate band would be doubled to £650,000, with any excess taxed at a 40% rate.

For example, a couple that are a basic rate taxpayer, aged 65 have two children, own a property worth £500,000 and have savings of £106,000. In the 'will', they leave their assets to their spouse and then to their children. The estate on second death is worth £606,000 and therefore below the doubled nil rate band with no IHT for the children to pay. However, the couple inherits a £90,000 property and this increases the value of the estate on second death to £696,000. This means there is a potential IHT liability for the children on the excess above the nil rate band of £46,000.

If the couple sell the property and invest the proceeds to a bank or building society, it is still in the estate, there is an IHT liability and could earn interest of £4,320 net of basic rate tax (assumes interest of 6.0% gross, net of £4.8% and basic rate tax of 20% for the tax year 2009/10). If they buy purchased life annuities on a joint basis, a level annuity, no guarantee, without proportion, paid monthly in arrears and 50% dependents income the income is £5,569 net of tax and there would not be an IHT liability.

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Annuity Rates
  55 £6,157  
  60 £6,591  
  65 £7,295  
  70 £8,213  
  55 £5,902  
  60 £6,307  
  65 £6,868  
  70 £7,669  
£100,000 purchase, level and standard rates
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