purchased life annuity?

[Deleted User]

I have no knowledge about this type of annuity. I found a little information on the net ie that they have a tax advantage compared to a normal annuity. Can some of the whizz kids on here please explain some more.

I am thinking ahead, as usual. We will, in the future, be withdrawing the 25% tax free element of a sipp and will be tucking some cash away as a safety net but that still leaves a substantial amount of cash. The idea of having an annuity income as a base income is quite attractive

If we do decide to get one then what is the best way forward?

DavidLaGuardia

A Purchase Life Annuity is purchased from your own funds rather than the 75% of a pension that has to be used as an income theough a compulsory purchase annuity or unsecured pension. You could therefore use the 25% cash from a pension to buy one.

The difference in tax is that on a compulsory purchase annuity etc, the income is fully taxable, whereas the purchase life annuity payments are part return of captial and part interest over your expected lifetime (in principle any annuity is a loan to an inusurance company whcih is paid back to you over your eaxpected lifetime. Those who live longer than expected are effectively subsidised by the ones who died earlier)

The Capital element is not taxable. The older you are, the higher this amount will be, as there is a shorter expected payment period.

Annuities are then divided into the guaranteed sort (based on gilt yields) and ones where there is an investment element in with profit or unit linked funds.

Comparison tables to be a bit of a blunt insturment and DIY investment in this area would be onerous. For what is typically a 1% commission/fee on the fund (which may not saved going direct) I would see an IFA who can readily and accuratately source, compare and contrast annuiities on your behalf.

dunstonh

If we do decide to get one then what is the best way forward?

purchased life annuities are not fully taxed. The capital element isnt. However, you still need to cost them up against a lifetime annuity as annuity rates are often tiered on the value of the investment. A lifetime annuity from a large pension can pay a higher income sometimes than a purchase annuity for a smaller amount. That can offset the tax difference.

Another option is to look at investments. Obviously with the annuity, you in most cases kissing goodbye to the capital (in the long run). So, why not use an investment that guarantees to pay 5% net for life. That is comparable to the annuity rate after tax and the capital is still there, albeit invested and subject to investment risk. That may or may not be the best option but it needs costing up and added to the list of options.

jamesd

By "that still leaves a substantial amount of cash" do you mean left over from the 25% or the remaining 75%?

One big disadvantage to using the lump sum for annuity purchase is that it starts out very flexible and any amount of it can be used for anything but if you buy an annuity with it you lose that flexibility. The bit left in the SIPP is locked up with limited withdrawing rates or annuity purchase, so there's no great loss of flexibility if you use part of that for the annuity purchase.

What you might do is gradually shift the lump sum into ISA investments so that it can produce a regular tax free income, leaving you free to draw on any part of the capital if you have a need for it in the future. Perhaps for care fees or home repairs.

If you aren't already contributing the maximum 7000 per person each year into ISA investments it might be worth considering taking benefits from parts of the pension to let you do so, gradually changing much of your income from taxable to tax free.

Depending on your income it might also be worth considering the use of a investment bond tax wrapper with funds held inside it. These pay up to 5% a year (can be accumulated and withdrawn later) tax free while growth within the bond is taxed at roughly basic rate. It's possible to take more than 5% but that's taxable if it's not from accumulated unused allowances from previous years.

EdInvestor

There's no point in using an investment bond if you're not a higher rate taxpayer - you'll just be paying taxes inside the bond that you can easily avoid by investing directly. Not to mention unnecessary charges.

In retirement there is always a need for capital expenditure as well as income - whether it's a new car, fixing the roof, family wedding, medical or care costs, cruise of a lifetime whatever.

Unwise to give up capital if you don't have to, IMHO.

dunstonh

There's no point in using an investment bond if you're not a higher rate taxpayer

There are ample examples where basic rate taxpayers or even non taxpayers could be best using a bond.

For example, an annuity chargeable to income tax taking income above £20,900 and losing age allowance. A bond can keep the income tax down and give you back the age allowance.

Not to mention unnecessary charges.

Even though the charges can often be a lot lower than the alternatives.

jamesd

EdInvestor, there was a reason why I wrote "depending on your income". For above average or well below average income it could be best. In the middle convenience might make it preferred even if it's not the best financially.

Also, the context here is kittie writing about withdrawing money from a SIPP, so this is retirement planning territory and that means we need to consider the potential for age allowance reduction or potential care fees liability if an investment bond isn't used. Either of those could make an investment bond the best tax wrapper for this case.

kittie, we don't actually know enough to know what's likely to be most appropriate for you because we don't know critical things like income from the state or other pensions, ages, whether there's a risk of early need for residential care or just your general attitude to ups and downs of investments.

[Deleted User]

thanks for the additional info. It was just a thought. I am always mulling things over. Sipps, ISAs, ns&i certs, shares, gilts. It`s about spreading risk

I will not be using any investment bond nor (sorry) an IFA as I am more than able to run our own finances and stock portfolio. However kissing goodbye to the capital makes any annuity unattractive to me so I`ll be looking at other vehicles. I will probably build up another hyp portfolio, depending if limit buys kick in and that depends on the stock market

dunstonh

I will not be using any investment bond nor (sorry) an IFA as I am more than able to run our own finances and stock portfolio.

Going DIY is not a reason to rule out an investment bond. Seeing as investment bonds have exactly the same investments available to them as unit trusts, ISAs and SIPPs, then disregarding that tax wrapper doesnt make sense unless there is a financial reason to do so.