Can you buy annuities for cash?

shireknight

The idea of a pension is to save up a pot of cash and then buy an annuity, I understand that but do you need to use a pension fund to buy them or can I purchase one with cash?

I'll tell you my thinking :-

I don't have a pension but I do have a house so if I was to sell the house for £100'000 for example I could put that money in the bank and earn £1000 per year interest for every 1 interest rate point and still have the original £100'000 sitting in the bank thirty years later.

However could I buy an annuity with it instead and get a higher rate of interest because they get to keep the £100'000 when I die or would I get less than I would in a bank account because they have to safeguard themselves against me living on for thirty years please?

Jack_Griffin

After 30 years inflation would make the original £100K worth £30K (based on historical rates from 1982 to 2012)

Annuities work because there is a pool of buyers, some live a long time & get paid out more, some don't and their fund is used to fund the longer lived pensioners. Also the funds are usually invested in government gilts, so unless there is some massive break down of society they are as safe as they could possibly be & even WWII didn't do that.

Anyway, do you realise that every 80p you put into a pension fund magically becomes £1 due to 20% tax relief.

There are limits to the reliefs, but they are...(I think)
1) Not earning an income - you can put £3000 in, it becomes £3600
2) Earning up to £50,000 - you can put upto £50,000 in each year.
3) Anything over £50K in a year doesn't get tax relief.
So why would you give that 20% up, might as well dribble cash in as fast as possible from a savings account if you have it to use for a pension, then buy an annuity.

Linton

You can buy an annuity with a taxed lump sum. The income is largely non-taxed as most is regarded as return of capital. Google "purchased life annuities" or talk to your friendly IFA for more info.

shireknight

Typical annuity rates – SINGLE LIFE


These conventional annuity rates are for a pension of £100,000 after the tax free lump sum of £33,333 has been taken. Specific rates available on request.

Level annuity rates

Male Single Life
Male 55 £5335
Male 60 £7324
Male 65 £8789
Male 70 £8976
Male 75 £10235

Just found this on a website, so if I'm correct I could buy a lifetime annuity with rates matching the above for just £66'666? -is that right because that sounds very, very good to me.

hugheskevi

Those rates are way too high - a single-life, non-escalating annuity for a 65 year old male in good health based on a £100,000 pot would purchase about £5,000 - £5,500 or perhaps a bit more p/a at the moment (source here). Beware of online comparison tables though - they should only be used as a broad guide as to rates.

The example in your post is based on an individual with a pension pot of £133,333 who takes a 25% tax free lump sum of £33,333, leaving £100,000 to purchase an annuity.

If you have a £100,000 outside of a pension, I understand (but am happy to be corrected) that Purchased Life annuity rates are typically a bit lower than pension rates.

It isn't that you would pay less for an annuity using non-pension wealth, rather, you would pay far less tax on the income received. So continuing the example, your £100,000 would buy a bit less of an annuity than a pension fund, but you would then pay very little income tax on the annual income.

shireknight

Ah got you, thanks a lot hugheskevi

dunstonh

purchased life annuity is generically the correct product although you tend to find that the market rates are not great and market conditions deter most people.

Immediate vesting personal pensions can be used, subject to income limits. Or annual use of the pension allowance in retirement to build a pot to commence later on (quite useful for balancing spouse provision when retirement planning up to retirement has not gone well and its too heavy on one side)

xylophone

This might be of interest if you go down the PLA route http://www.hmrc.gov.uk/incometax/life-annuity-income.htm
https://forums.moneysavingexpert.com/discussion/3961193

dbayliss

yes but get an open market option quotation first

jamesd

You could instead invest the money and take between 4% and 6% of it in income and still have a good chance of the money still being around when you die. 4% is quite cautious, 6% has more chance of draining it and probably would after allowing for inflation. Do this within an ISA and it's tax free income.

If you aren't near to going over a tax rate threshold it can be more efficient to pay the money into a pension, subject to the limits on that, then buy an annuity with 75% and take a tax free lump sum of 25%. This annuity market is more competitive than the purchased life annuity one so you may well get more income for the same amount of money.

The purchased life annuity has some of its income tax free, need a quote to know how much but a reasonable approximation might be 80% or so to get started in rough calculation.

Do you have a spouse who would need income after your death? That tends to favour using the invest the money option rather than buying an annuity but it does depend on the specific income needs and other circumstances.