Purchased Annuity not from pension pot

Albermarle

MSE_James said:

@Skibunny40  - I suspect you need to go to https://forums.moneysavingexpert.com/drafts and click the X to delete any draft reply that is blocking you from posting in this thread. 

Thanks from me as well, as I have been having that trouble recently and did not realise how to get rid of the offending ones !

HappyHarry

Skibunny40 said:

With interest rates rising, I'm considering buying a small annuity as part of our retirement strategy. However, I don't have much in a pension pot but I will have savings (£100k) that I could use to buy an annuity. However, I keep reading that a purchased annuity is  taxed differently to one bought from a pension pot but I don't understand how. Could one of you clever people explain it in very simple language for me please?

For a purchased life annuity, a proportion of the income is classed as return of capital by HMRC and is not taxable.

This means that the tax due on a purchased life annuity is less than that on a pension annuity.

The older you are, the larger the proportion of income that is treated as return of capital.

Albermarle

HappyHarry said:

Skibunny40 said:

With interest rates rising, I'm considering buying a small annuity as part of our retirement strategy. However, I don't have much in a pension pot but I will have savings (£100k) that I could use to buy an annuity. However, I keep reading that a purchased annuity is  taxed differently to one bought from a pension pot but I don't understand how. Could one of you clever people explain it in very simple language for me please?

For a purchased life annuity, a proportion of the income is classed as return of capital by HMRC and is not taxable.

This means that the tax due on a purchased life annuity is less than that on a pension annuity.

The older you are, the larger the proportion of income that is treated as return of capital.

Can you explain why they seem to be more expensive? More admin? Niche product/less competition?

Skibunny40

HappyHarry - that sounds like good news on the tax element then. Does it get taken off by the annuity company or would I have to complete a self-assesment form each year?

Audaxer

Skibunny40 said:

The lump sum is made up of ISAs I've built up

If the £100k is in Cash ISAs, have you considered transferring them into an S&S ISA and investing in a portfolio of investments to provide you with tax free income?

Skibunny40

Audaxer - we have other S&S investments, I just like the idea of having a base amount of "confirmed" income in retirement as well as drawdown. Especially at the moment, when interest rates for annuities are going up.

HappyHarry

Skibunny40 said:

HappyHarry - that sounds like good news on the tax element then. Does it get taken off by the annuity company or would I have to complete a self-assesment form each year?

It should be taken off by the annuity company.

This would be worth a read through: https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/purchase-life-annuity

dunstonh

Albermarle said:

HappyHarry said:

Skibunny40 said:

With interest rates rising, I'm considering buying a small annuity as part of our retirement strategy. However, I don't have much in a pension pot but I will have savings (£100k) that I could use to buy an annuity. However, I keep reading that a purchased annuity is  taxed differently to one bought from a pension pot but I don't understand how. Could one of you clever people explain it in very simple language for me please?

For a purchased life annuity, a proportion of the income is classed as return of capital by HMRC and is not taxable.

This means that the tax due on a purchased life annuity is less than that on a pension annuity.

The older you are, the larger the proportion of income that is treated as return of capital.

Can you explain why they seem to be more expensive? More admin? Niche product/less competition?

Tiny market so very small cross subsidy pool.  

Audaxer

Skibunny40 said:

Audaxer - we have other S&S investments, I just like the idea of having a base amount of "confirmed" income in retirement as well as drawdown. Especially at the moment, when interest rates for annuities are going up.

I can understand that, but just wondering that at only 55 years old, what sort of rate would you get for such an annuity?

Skibunny40

https://www.hl.co.uk/retirement/annuities/best-buy-rates 

was the site I looked at to get a rough idea. I hadn't considered doing it this early until rates started rising so rapidly, which made me think locking in a better annual amount might be a smart move, in case rates fall again in a few years