Tax Implications of buying an annuity

r.jenkins36

I would appreciate advice please.  I consolidated various small pensions into two drawdown pots, with Pensionbee and Moneyfarm.  I'm now considering buying an annuity with the capital in the pots. A financial advisor told me that I would be liable for tax on the capital amount when moved, as well as the income from an annuity. This seemed unfair so I did some internet searches which suggest I would be liable for tax on the income but not on the capital. Looking for a definitive answer I wrote to HMRC in May - but they tell me I can't expect an answer before December!! At 72 years old, such a wait is uncomfortable!  Can forum experts help please? Thank you.

Dazed_and_C0nfused

r.jenkins36 said:

I would appreciate advice please.  I consolidated various small pensions into two drawdown pots, with Pensionbee and Moneyfarm.  I'm now considering buying an annuity with the capital in the pots. A financial advisor told me that I would be liable for tax on the capital amount when moved, as well as the income from an annuity. This seemed unfair so I did some internet searches which suggest I would be liable for tax on the income but not on the capital. Looking for a definitive answer I wrote to HMRC in May - but they tell me I can't expect an answer before December!! At 72 years old, such a wait is uncomfortable!  Can forum experts help please? Thank you.

Do you mean you are withdrawing the money and buying a "Purchased Life Annuity"?  If so they are likely correct.

But if you are using the pension fund to buy a normal annuity they are talking nonsense.

And I'm not sure it's HMRC role to answer question like that to be honest.  You will probably get some generic reply that doesn't answer your specific situation.

Linton

The tax on annuities is different depending on whether you buy one directly with money held within a personal pension (a "pension annuity")  or buy one outside  ("purchased life annuity", PLA).  Pension annuities are far more common and generally are better value because of the small amount of competition in the PLA market.

A pension annuity is treated as income and taxed accordingly just like wages.

Purchased life annuities are taxed in the basis that a significant proportion of an annuity payment is simply returning yur own money which is not taxed.  The rest is taxed as income.  Of course if the money originally came from a personal pension you would probably have paid tax on the capital withdrawal. 

eskbanker

r.jenkins36 said:

A financial advisor told me that I would be liable for tax on the capital amount when moved, as well as the income from an annuity. This seemed unfair so I did some internet searches which suggest I would be liable for tax on the income but not on the capital.

If you're in dialogue with a financial advisor, who's presumably seen the detail of what you have in mind, why wouldn't you challenge them directly with questions about this, rather than resorting to t'internet?

Bostonerimus1

Is your money inside a pension wrapper? If it is and you convert the money to an annuity then you will pay income tax on the payments from that annuity.

zagfles

eskbanker said:

r.jenkins36 said:

A financial advisor told me that I would be liable for tax on the capital amount when moved, as well as the income from an annuity. This seemed unfair so I did some internet searches which suggest I would be liable for tax on the income but not on the capital.

If you're in dialogue with a financial advisor, who's presumably seen the detail of what you have in mind, why wouldn't you challenge them directly with questions about this, rather than resorting to t'internet?

Probably because t'internet, especially forums like this, will more likely get a correct answer than most IFAs 

ob1kinobi

If you have a pension pot containing uncrystalised funds, it should be possible to withdraw from that a tax free lump sum of up to 25% before purchasing an annuity. Once the funds are crystallised some other providers will not accept transfers to them, so it is best to get clarification on your specifics before you do so. I was in a similar position and had two small pots and I chose to purchase an Annuity from Canada Life. I was not in drawdown mode at that point however. This provider is just one of a number of similar competitors in the UK market, worth doing some research on. I am happy with my decision but when I was at the quotation stage I explained that I had two small pots from different providers and was told that they could be combined into one Annuity (i.e. one monthly income payment). The 'transfer' was seamless and the Annuity provider (Canada Life) collected the two pots of money on my instruction, much like an ISA transfer. However, the two pots of money arrived at C.L. one week apart, and subsequently I have two Annuity account references, and receive two monthly income payments, one week apart. From an HMRC point of view, the Annuity provider informs the tax office of the total income, much like an employer would, and the tax (20% for my case) is deducted from one of the two payments. In my case I was unable to combine my two small pots prior to purchasing my Annuity as both were Crystalised (i.e. maximum tax free lump sums had been taken from both). Hope that this helps.

dunstonh

Tax Implications of buying an annuity

What type of annuity?
Pension into a lifetime or fixed term annuity?
Or a purchased life annuity using funds that are not in a pension?

A financial advisor told me that I would be liable for tax on the capital amount when moved, as well as the income from an annuity.

There is no tax when putting money into an annuity but there may be tax if you are drawing from assets that would be taxable on their sale.  But no tax if there isn't.

Lifetime annuities are taxed as income (pretty obvious why and fair enough)
Purchased life annuities can have taxation, but at a much reduced rate.  Sometimes little or not tax.

Looking for a definitive answer I wrote to HMRC in May - but they tell me I can't expect an answer before December!! 

An IFA would give you the definitive answer. Even an FA could.  As you have spoken to an FA, you should have their answer.

badmemory

I think the more important question is - was this a financial advisor or an independent financial advisor.  I suspect the first.