What exactly are Purchase Life Annuities?

Ignoramus

When researching annuities on the net, I've come across pages explaining the different types as lifetime, with-profits, unit-linked, and sometimes purchase life. Further investigation has suggested however that PLAs are actually a totally different category of annuity and shouldn't be bundled into such a list.

Anyway I am now quite confused and have a number of questions re PLAs:

1. Is a PLA just a generic term for an annuity that anyone can buy (ie not a compulsory annuity from a pension fund)?
2. If so, does it come in different types like a compulsory annuity? (ie with-profits, unit-linked)
3. I have read that you can get PLAs for life as well as for a fixed term. I have also read that PLAs get tax benefits (which make up for generally lower rates compared to compulsory annuities), because part of the income is seen as return on capital and as such is not subject to income tax. Does this tax benefit apply to life long PLAs as well as fixed term PLAs? (the tax explanation doesn't make sense if it applies to life long PLAs as well)
4. What are the best internet (or other) resources that could explain or let me compare PLAs?

Thank you very much for any clarifications!

dunstonh

Is a PLA just a generic term for an annuity that anyone can buy (ie not a compulsory annuity from a pension fund)?

PLA is a type of annuity that can be bought with normal funds (not pension)

If so, does it come in different types like a compulsory annuity? (ie with-profits, unit-linked)

It is a type of annuity

I have read that you can get PLAs for life as well as for a fixed term. I have also read that PLAs get tax benefits (which make up for generally lower rates compared to compulsory annuities), because part of the income is seen as return on capital and as such is not subject to income tax. Does this tax benefit apply to life long PLAs as well as fixed term PLAs? (the tax explanation doesn't make sense if it applies to life long PLAs as well)

Yes

What are the best internet (or other) resources that could explain or let me compare PLAs?

Its generally an IFA product. I doubt there is much in the way of internet sites that offer them (its classed as an investment product).

Ignoramus

Thanks for your reply dunstonh, this seem to be your boards here!

dunstonh wrote: »

It is a type of annuity

Given your answer to my other question below, does that mean that the only different types of PLA are, a lifetime PLA or a fixed-term PLA?

dunstonh wrote: »

Yes

If this is the case, why does that tax benefit not apply to compulsory annuities as well? Or is the explanation of the tax benefit mistaken?

dunstonh wrote: »

Its generally an IFA product. I doubt there is much in the way of internet sites that offer them (its classed as an investment product).

Is there anywhere at least that might explain roughly how much tax benefit one might expect? Does the amount of return on capital and interest change for each product?

****EDIT - I found the HMRC page which gives the basic equation: http:// www. hmrc. gov. uk/manuals/iptm/iptm4320.htm (remove spaces)********

I fully intend on going to an IFA, (I am already in/have been in contact with a couple) but I'd like to be as informed as possible first.

bigfreddiel

the ifa i aw just laughed about them - said don't bother with them, then proceded to encourag me to hand over my isa's (£100k+) so he could transfer them to skandia - the platform they use on behalf of their clients, sounded fine and dandy till he wanted 4% +1 and 1/2% per annum for rebalancing and reporting,

Told him he was having a laugh!

fj

Loughton_Monkey

A Purchased Life Annuity is, as in your assumption 1, and as confirmed above, an Annuity that you simply buy with 'cash' from whatever source (but not pension schemes).

In many other espects, they are like Pension Annuities insomuch that they usually last for life (but you can select a fixed period). You pay over the money, and that locks you into the income you have been quoted. If for life, you can "guarantee" them for X years, and/or have them escalate by, say, 3% or 5%.

There is a taxation difference. With pensions, the whole income is taxable. With Purchased Annuities, the provider will do a calculation to determin what proportion of the annuity is "interest" and what proportion is "return of capital". You pay tax on the 'interest' element only.

The primary reason you would buy one (although it's a very rare product these days) is for what I can only term 'Life Assurance in reverse'. In other words, if you lived exactly to your "Average Life Expectancy", then the income you receive would be similar to what you would get by putting it into 'savings' accounts and drawing that fixed amount from the account to spend.

Given that the Annuity Provider needs to make a profit (but maybe can invest a bit better than an individual) I would expect the annuity to be marginally less value.

However, the minute you continue living beyond your normal life expectancy (as measured when you took it out) you are 'in profit' because the annuity keeps rolling in. So it 'underwrites' longevity for you. It creates 'certainty' rather than you haveing to 'guess' how much you could draw down from your savings account(s).

Conversely, if you die earlier, then the annuity stops. As an investment, you have 'lost', but since, by definition, you would be dead, you probably wouldn't care. In other words, also ideal if you have no dependants to whom you would wish to leave money.

If you fully understand them (and it's not difficult) and you are sure you want one, then I'm not sure it's worth paying too much for an IFA. Although some might be fairly 'cheap' because their job is quite simple. Just a matter of 'shopping around'. Once purchased, the IFA ceases to be of any value (in respect of the Annuity anyway). Typically, they may receive around 2% of your lump sum as a commission.

I believe there may be products around such as a "With Profits Purchased Annuity" but I cannot be sure. For this type of annuity, the "interest" element of the annuity is a little bit more transparent, and you get an amount that is really 'drawing down' from a With Profits fund. In concept, this differs from the 'standard' annuity in transferring most of the investment risk to yourself. THerefore, you may get more. You may get less. It all depends how well the WP Fund performs.

feesarefare

bigfreddiel wrote: »

4% +1 and 1/2% per annum for rebalancing and reporting,

your lucky he told you about that in advance

Told him he was having a laugh!

Youll be one of the few - well done

bigfreddiel

feesarefare wrote: »

bigfreddiel wrote: »

your lucky he told you about that in advance



Youll be one of the few - well done

Well, he didn't actually tell me in advance (the 4% fee) he denied it at first, said they took no fee, so I persevered and said do I have 100% funds transferred and invested in skandia funds? Oh no, he laughed, of course not, they charge 4% and give him half. I askd him if he ha ver heard of commshare, or fidelity, who operate discounts, and give me half the annual costs? He pleded ignorance on that.

I also asked for examples of their portfolios and the strategy they use for their 10 levels of risk, no way could he explain it, its all done by one epert back at head office!

I guess there are good ifa's out there, just like there are good builders, good garages, which reminds me:

Q: How can you tell when a lawyer is lying?
A: His lips move Q: What is the difference between a dead dog in the road and a dead lawyer in the road?
A: There are skid marks in front of the dog.
Q: Why won't sharks attack lawyers?
A: Professional courtesy.
Q: What does a lawyer and a sperm have in common?
A: Both have about a one in 3 million chance of becoming a human being.
Q: What do lawyers use as contraceptives?
A: Their personalities.


and more to the point:


How many IFAs does it take to change a lightbulb?
Answer: Two

1 to change the bulb
1 to calculate the commission. Sorry "fee"


fj

Loughton_Monkey

bigfreddiel wrote: »

How many IFAs does it take to change a lightbulb?
Answer: Two

1 to change the bulb
1 to calculate the commission. Sorry "fee"

A little bit unfair to all the diligent IFA's on this board (of which I am proud to say I am not one). Especially as they are 'regulated' only for investment advice and not to do electrical work. That requires a qualified electrician.

Our local undertaker always ensures that he buries IFA's in a 12 foot grave instead of the normal 6 foot. His reason is "Deep down, they're nice people."

bigfreddiel

Loughton_Monkey wrote: »

A little bit unfair to all the diligent IFA's on this board (of which I am proud to say I am not one). Especially as they are 'regulated' only for investment advice and not to do electrical work. That requires a qualified electrician.

Our local undertaker always ensures that he buries IFA's in a 12 foot grave instead of the normal 6 foot. His reason is "Deep down, they're nice people."

Very funny, here's a few more:

Did you hear about Robby Knievel's newest stunt ? He will attempt to jump 1,000 IFAs with a bulldozer.

Changing IFAs is like changing decks on the Titanic.

What's the difference between an IFA and a leech? A leech quits sucking your blood after you die.



What's the difference between an IFA and a vampire? A vampire only sucks blood at night.

How can you tell when your IFA is lying? His lips move.

Why are IFAs never attacked by sharks? Professional courtesy.

IFAs are safe from the threat of automation taking over their professions. No one would build a robot to do nothing.



Don't get upset everyone - its just a bt of fun!

Cautious_Investor_3

Hi

Have found a couple of sources of info on PLAs:

http://www.!!!!!!.uk/technical-area/retirement/a-guaranteed-annuity-with-less-tax-to-pay/

http://www.annuities-online.com/types_of_annuity/purchased_life_annuities.html

I hope they help you.

The Cautious Investor

bigfreddiel

Cautious_Investor wrote: »

Hi

Have found a couple of sources of info on PLAs:

http://www.!!!!!!.uk/technical-area/retirement/a-guaranteed-annuity-with-less-tax-to-pay/

http://www.annuities-online.com/types_of_annuity/purchased_life_annuities.html

I hope they help you.

The Cautious Investor

C I - Cheers, that was useful, I've book marked those, but maybe you can comment,

I'm due to get about £25k lump sum from my Classic civil service pension, reverse commutation is not so good, equates to about £1000 per annum onto my pension.

So I though a PLA might be a good idea, as I can claim an enhancement due to my health - and I have about £400k in other investmenst (not including my property worth about £600k) so £25k altho significant, isn't a huge percentage,and I have no debts.

I'm a saver not a spender (pretty obvious really) and I like to know what I'm getting every month so to me a PLA or annuity is attarctive to my mindset, but maybe not the best thing to do.

Cheers

fj