Fixed Term Annuity Tax Question

rebs

I am planning to purchase a fixed term annuity and want to understand if there is any difference in tax treatment between, for example, an annual income of £30,000 for 10 years followed by a maturity value of £30,000 OR an annual income of £30,0000 over 11 years?

I am not quite sure of the correct terminology for that final £30,000 - some calculators use simple terms like 'do you want an amount of money returned at the end of the term' and other places talk about 'maturity value' at the end of the term.

But essentially, my question boils down to is there any material difference in terms of cost or tax treatment by having that final 'maturity value' or not? For example, if that final amount were not treated as income, that would be advantageous.

Dazed_and_C0nfused

rebs said:

I am planning to purchase a fixed term annuity and want to understand if there is any difference in tax treatment between, for example, an annual income of £30,000 for 10 years followed by a maturity value of £30,000 OR an annual income of £30,0000 over 11 years?

I am not quite sure of the correct terminology for that final £30,000 - some calculators use simple terms like 'do you want an amount of money returned at the end of the term' and other places talk about 'maturity value' at the end of the term.

But essentially, my question boils down to is there any material difference in terms of cost or tax treatment by having that final 'maturity value' or not? For example, if that final amount were not treated as income, that would be advantageous.

Is the final £30,000 returned to the pension wrapper or to you?

dunstonh

The "maturity" value remains in the pension tax wrapper.  So, no tax payable as it never left the pension wrapper.

rebs

oh, that is very interesting.. I didn't realise that the maturity went back to the pension wrapper.  

Is that always the case, or a choice I would need to make?

dunstonh

rebs said:

oh, that is very interesting.. I didn't realise that the maturity went back to the pension wrapper.  

Is that always the case, or a choice I would need to make?

Yes, it's always the case for the first step. 
If you decide to add a second step of taking that lump sum under drawdown then it would be taxable (just as any drawdown of crystallised funds would be)

rebs

Thank you - that's really helpful.

So what is the advantage of having that maturity bit at the end?  why not simply pay a tad less up front and have zero at the end?  where is the benefit?

dunstonh

So what is the advantage of having that maturity bit at the end?  why not simply pay a tad less up front and have zero at the end?  where is the benefit?

fixed term annuities are generally used to cover short term needs where you are looking for security of income in that particular period.  e..g funding the gap until state pension or later secure income kicks in.

So, you set the income you need and any residual fund is paid at the end of it and available for you to use appropriately later on.  That excess is fixed so you know exactly what you are going to get and can plan accordingly.

Its just a variation of paying less into the fixed term annuity at the start and getting zero back.   Some pensions do not allow partial transfers.   So, the whole fund would need to go over and the excess at the end is a way of dealing with anything not needed.   Of course, many of the modern plans that offer fixed term annuities can offer drawdown within them or even have the income paid within the pension and not paid to bank account (some like option instead of buying gilts/bonds within their pension).  Basically, lots of options to suit different needs by different people at different times.

rebs

dunstonh said:

So what is the advantage of having that maturity bit at the end?  why not simply pay a tad less up front and have zero at the end?  where is the benefit?

fixed term annuities are generally used to cover short term needs where you are looking for security of income in that particular period.  e..g funding the gap until state pension or later secure income kicks in.

So, you set the income you need and any residual fund is paid at the end of it and available for you to use appropriately later on.  That excess is fixed so you know exactly what you are going to get and can plan accordingly.

Its just a variation of paying less into the fixed term annuity at the start and getting zero back.   Some pensions do not allow partial transfers.   So, the whole fund would need to go over and the excess at the end is a way of dealing with anything not needed.   Of course, many of the modern plans that offer fixed term annuities can offer drawdown within them or even have the income paid within the pension and not paid to bank account (some like option instead of buying gilts/bonds within their pension).  Basically, lots of options to suit different needs by different people at different times.

Thanks - again very helpful... I think this bit in bold gets to the nub of my question - no significant advantage either way but takes care of non partial transfers.

On the subject of not allowing partial transfers - I am looking at purchasing from Canada Life and they say they don't allow partial transfers.  My pension is with Hargreaves Lansdown and I don't want to transfer the whole lot - just use some of the pot for this.  I thought I might crystallise the chunk I don't want to use - leaving the cost of the fixed term annuity uncrystallised so that portion could be transferred in full.  Would that work?