Purchased Annuity not from pension pot

Skibunny40

Mind you, maybe those are pension annuity rates? Hadn't realised purchased annuity rates would be worse until I saw some of the comments on here. Not sure how big the difference would be?

xylophone

You might want to consult an IFA if you decide to go down this route.

https://adviserbook.co.uk/

Tick "confirmed independent" and "retirement planning" when the menu comes up.

https://annuitysupermarket.com/purchase-life-annuity/

Malthusian

According to sharingpensions.co.uk, in July 2022 a 65 year old could buy a purchase life annuity at 5.1% before (double) tax. 
It's a bit tricky to find a directly comparable rate for pension annuities because the gilt market has been so volatile in the past few months. But you would be looking at 6%+ for a pension annuity at the same time.
They don't quote rates for 55 year olds but the rate at 60 is only 4.3% single life, 3.8% for joint life both aged 60. You're probably looking at something like 3%pa for two 55 year olds. I.e. 33+ years just to get your money back, in which time the real value of your income would be worth less than half what it was at the start, and that's assuming that inflation goes back down to 2.5%pa.
Bear in mind this is still based on July figures so the rates will have changed since.

EdSwippet

Malthusian said:

According to sharingpensions.co.uk, in July 2022 a 65 year old could buy a purchase life annuity at 5.1% before (double) tax. 

Why "double" tax? From Drewberry Insurance:

There are some tax advantages to buying a purchased life annuity. With a pension annuity you have received tax relief on the cash you’ve paid in throughout your working life, so the income from your pension is taxed.

With a purchased life annuity, it’s assumed you’ve paid tax on the cash you’re using to buy the annuity already (e.g. inheritance tax, income tax, capital gains tax etc.). The result is that part of your purchased life annuity isn’t taxable as income. Instead, it’s treated as a tax-free return of the initial capital invested.

As a matter of course, anybody intending to annuitise their entire DC pension should structure things so that they buy two separate annuities, one a purchased annuity bought with the 25% PCLS, the other a pension taxable annuity bought with the remaining 75%. Buying a simple pension annuity with the entire DC pension in one go loses the tax advantage created by the purchased annuity's tax-free return of capital element.

Malthusian

EdSwippet said:

Why "double" tax? From Drewberry Insurance:

Because there is also a taxable element to the PLA, even though the PLA is bought out of money you've already paid tax on. A pension annuity by contrast is bought with "pre-tax" pension money. 

As a matter of course, anybody intending to annuitise their entire DC pension should structure things so that they buy two separate annuities, one a purchased annuity bought with the 25% PCLS, the other a pension taxable annuity bought with the remaining 75%. Buying a simple pension annuity with the entire DC pension in one go loses the tax advantage created by the purchased annuity's tax-free return of capital element.

They should definitely investigate the option, but due to PLAs having a lower annuity rate than pension annuities, it is possible that buying a pension annuity instead of taking PCLS may work out better, even after accounting for the extra tax.
Impossible to say which option is best (PLA + pension annuity or forgo the tax advantage and buy a pension annuity with the lot) without looking at the exact annuity rates applicable to the individual and looking at their tax position. 

EdSwippet

Malthusian said:

EdSwippet said:

Why "double" tax? From Drewberry Insurance:

Because there is also a taxable element to the PLA, even though the PLA is bought out of money you've already paid tax on. A pension annuity by contrast is bought with "pre-tax" pension money. 

Right. However, the taxable part of a purchase annuity will effectively be the gain (interest, dividend income, and so on) realised on the assets held within the annuity, and the non-taxable part is a return of capital.

The result is not significantly different to if you invested post-tax money yourself and then took 1/N withdrawals across N years. The difference being that in the latter case you can control when you pay the tax better by structuring your asset sales and withdrawals, but you run the risk of running out of money.

So not double tax at all. Just tax on the gain element of the payout.

From SharingPensions:

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.