Taxation of Annuities 24 November 2022 at 10:05AM in Savings & investments 4 replies 134 views

Redlander

You get tax relief when you save into a pension; but if you buy an annuity with that pension fund, you have to pay income tax on the annuity income; I suppose that is fair.

But what if you bought an annuity with your ordinary savings? Would you still have to pay tax on the annuity income?

Albermarle

Normally with an annuity from a pension pot, you take 25% tax free first, before buying an annuity, with the remaining 75%. So that reduces the overall tax take.
If you buy an annuity with non pension income (quite a rare thing to do apparently). Part of the income is seen as return of capital and not taxed, and part is seen as investment growth and taxed. AFAIUI.

dunstonh

But what if you bought an annuity with your ordinary savings? Would you still have to pay tax on the annuity income?

Purchased life annuities are taxed differently.  However, that product is very very very niche nowadays.   Commercial terms are rarely favourable.

MEM62

Redlander said:

But what if you bought an annuity with your ordinary savings? Would you still have to pay tax on the annuity income?

Short answer - yes.

You pay income tax on virtually any income, even if that is generated from investments that you have made with post-tax income.  For example, buy a BTL and you are taxed on the profits, if you have sufficient income from savings you are taxed on that also.  For many ISA's will be the best vehicle to keep what you have away from the tax man.     

eskbanker

Redlander said:

what if you bought an annuity with your ordinary savings?

Perhaps worth elaborating on why you'd consider that?