Placing an inherited lump sum into and annuity

Bumdle

I am 73 years old and currently have a small workplace pension plus my state pension. I have just inherited some money and as part of a mixture of investments i want to buy an annuity. As 
I currently pay very little tax, will HMRC add 20% to my annuity purchase or do I have to put the money into  a pension fund first and then buy an annuity. I saw a post by Hargreaves Landsdowne that indicated i could not only get this HMRC tax contribution but also i could benefit from taking 25% tax free . Any advice or help would be very much appreciated. 

Dazed_and_C0nfused

Bumdle said:

I am 73 years old and currently have a small workplace pension plus my state pension. I have just inherited some money and as part of a mixture of investments i want to buy an annuity. As 
I currently pay very little tax, will HMRC add 20% to my annuity purchase or do I have to put the money into  a pension fund first and then buy an annuity. I saw a post by Hargreaves Landsdowne that indicated i could not only get this HMRC tax contribution but also i could benefit from taking 25% tax free . Any advice or help would be very much appreciated. 

As you don't have any earnings you will be limited to getting tax relief on £2,880 each tax year.  It's actually 25% that is added to your £2,880 will become £3,600 within the pension fund (the £720 being 20% of the gross contribution).

And you can't get pension tax relief once you reach 75.

Albermarle

The amount you can add to a pension is limited to £2880 per tax year,  as you appear to have no earnings income.
Otherwise HMRC are not going to add any 20% to your inheritance.

You can buy an annuity directly without going via the pension route. However it is rather a niche market and only a few providers offer it and as far as I know only via a financial advisor. On the positive side you will not pay much tax on the annuity income.

QrizB

Welcome to the forum.

You might be out of luck here.

The most you can pay into a pension is the amount of earned income you receive each year, or £3600 per year if you earn less than that. From what you've said you're retired so you'll have the £3600 limit. Also this is only available until you reach 75.

There are purchased life annuities that can be paid for with money that isn't in a pension, but you won't get the HMRC tax relief top-up with these.

How big is this inheritance and how much were you hoping to spend on an annuity?

Aretnap

To get tax relief (ie a contribution from HMRC) you would have to pay the money into a pension. However if you are not currently employed, the most you can pay into a pension in a year is £2880 (£3600 when tax relief is added). It is still worthwhile doing this as you can subsequently withdraw 25% of the total tax free and pay tax on the rest at your normal rate (giving you a 6.25% boost for very little effort if you are a basic rate taxpayer), however if you're talking about a large sum of money it would take a long time to pay it all into a pension at £2880 per year (added: and as the others have pointed out you can only do this until you are 75 anyway).

The alternative would be to look into a "purchased life annuity" which basically means an annuity bought with money which is not in a pension. They are a niche product compared with a "normal" annuity so there are fewer providers than for an annuity bought with pension funds, but they are available. There is no HMRC contribution to the cost of buying them, but on the other hand the tax rate you pay on the income is lower than for an annuity bought with pension funds - it is treated as a mixture of interest and simple return of capital rather than as income.

xylophone

https://www.mandg.com/wealth/adviser-services/tech-matters/investments-and-taxation/purchased-life-annuities/purchased-life-annuities

Dazed_and_C0nfused

Bumdle said:

I am 73 years old and currently have a small workplace pension plus my state pension. I have just inherited some money and as part of a mixture of investments i want to buy an annuity. As 
I currently pay very little tax, will HMRC add 20% to my annuity purchase or do I have to put the money into  a pension fund first and then buy an annuity. I saw a post by Hargreaves Landsdowne that indicated i could not only get this HMRC tax contribution but also i could benefit from taking 25% tax free . Any advice or help would be very much appreciated. 

I tried putting your post into ChatGPT and added the question Taking all this into account how much could I add to a pension?


✅ 1. Can HMRC add 20% to your annuity purchase directly?

No — HMRC does not top up annuity purchases directly. The 20% tax relief only applies when you contribute to a registered pension scheme, such as a personal pension, SIPP (Self-Invested Personal Pension), or workplace pension. After the contribution (and tax relief) is added, you could then use that pot to buy an annuity.

✅ 2. How tax relief works for you

Basic rate relief (20%) is added automatically when you pay into a personal pension.

Example: If you pay in £8,000, the provider claims £2,000 from HMRC, so £10,000 goes into your pension.

Higher-rate taxpayers can claim more via self-assessment, but that likely doesn’t apply here since you said you pay little tax.

✅ 3. Can you still contribute at 73?

Yes — there is no maximum age for contributing to a pension (unlike before 2015 when it stopped at 75).

However:

Contributions stop receiving tax relief after age 75, so you still have time.

You can only contribute within certain limits (see next point).

✅ 4. How much can you contribute?

You are limited by:

Relevant UK earnings (if you have none, you can still contribute up to £3,600 gross per tax year).

The annual allowance (currently £60,000 gross for most people).

The Money Purchase Annual Allowance (MPAA): If you have accessed any flexible pension income (like drawdown), your allowance for tax-relieved contributions drops to £10,000 gross per year.

For someone like you:

If you have no earned income, you can contribute up to £2,880 net (£3,600 gross) each tax year and still get tax relief.

If you do have earnings, you can contribute up to 100% of those earnings, capped at the annual allowance (usually £60,000 gross).

✅ 5. 25% tax-free lump sum (PCLS)

Yes, if you contribute to a pension and later take benefits (buy an annuity or take drawdown), 25% of the fund can be taken tax-free.

Example:

You pay £2,880 into a pension.

HMRC adds £720 → pot is £3,600.

You could then take £900 tax-free (25%), and use the rest for an annuity or income.

✅ 6. Strategy with your inheritance

You could:

Contribute £2,880 per year (net) into a SIPP (or personal pension) and get £720 tax relief.

If your inheritance is large and you want more tax efficiency, you can repeat this each tax year.

After building this up, you can buy an annuity with that pot, plus take the 25% tax-free lump sum.

Important Caveats

If you’ve triggered MPAA, your limit is £10,000 gross (but only relevant if you have earnings).

No tax relief after age 75, so you have roughly 2 years to do this.

Annuity income itself is taxable (but you said your tax is low, so likely minimal).

✅ Summary Answer:

You cannot get 20% added directly to an annuity purchase. You must first contribute to a pension (like a SIPP). At 73, you can still add £2,880 per year (net) and HMRC will add £720, giving you £3,600 gross. You could then take 25% tax-free and use the rest for an annuity.

Do you want me to:

✔ calculate how much extra you could accumulate by age 75 if you use the maximum allowance each year (with and without growth),

✔ or show a comparison of annuity income now vs after doing this for 2 years?

ChatGPT can make mistakes. Check important info.

dunstonh

I currently pay very little tax, will HMRC add 20% to my annuity purchase

If you use an immediate vesting personal pension, then you get tax relief of 20% (which equates to adding 25% if you look at it that way around). 

It's unlikely that at 73, you can put more than £3600 into a pension (you would need a business or be employed earning a higher amount)

 or do I have to put the money into  a pension fund first and then buy an annuity

If you are looking at a purchased life annuity (that doesnt involve pensions) then you would pay it to the PLA provider.

Purchased life annuities do not get tax relief but you pay little or nothing on the income.
PLA's are only available via IFAs.

poseidon1

Bumdle said:

I am 73 years old and currently have a small workplace pension plus my state pension. I have just inherited some money and as part of a mixture of investments i want to buy an annuity. As 
I currently pay very little tax, will HMRC add 20% to my annuity purchase or do I have to put the money into  a pension fund first and then buy an annuity. I saw a post by Hargreaves Landsdowne that indicated i could not only get this HMRC tax contribution but also i could benefit from taking 25% tax free . Any advice or help would be very much appreciated. 

On the assumption  you are fully retired with no earned income, concentrate on dunstonh's post covering purchase life annuities ( PLAs). These are the only annuities worth your while exploring at your current age and to meet your specific requirements. 

As mentioned by others, Sipps and the pensions you can buy with the very limited contributions levels,  don't seem to make much sense for your circumstances given that we can also assume the quantum of  your inherited capital is considerably more than £2,880.

DRS1

If you want to use the inheritance to provide an income maybe think about a gilt ladder?

Albermarle

Dazed_and_C0nfused said:

Bumdle said:

I am 73 years old and currently have a small workplace pension plus my state pension. I have just inherited some money and as part of a mixture of investments i want to buy an annuity. As 
I currently pay very little tax, will HMRC add 20% to my annuity purchase or do I have to put the money into  a pension fund first and then buy an annuity. I saw a post by Hargreaves Landsdowne that indicated i could not only get this HMRC tax contribution but also i could benefit from taking 25% tax free . Any advice or help would be very much appreciated. 

I tried putting your post into ChatGPT and added the question Taking all this into account how much could I add to a pension?


✅ 1. Can HMRC add 20% to your annuity purchase directly?

No — HMRC does not top up annuity purchases directly. The 20% tax relief only applies when you contribute to a registered pension scheme, such as a personal pension, SIPP (Self-Invested Personal Pension), or workplace pension. After the contribution (and tax relief) is added, you could then use that pot to buy an annuity.

✅ 2. How tax relief works for you

Basic rate relief (20%) is added automatically when you pay into a personal pension.

Example: If you pay in £8,000, the provider claims £2,000 from HMRC, so £10,000 goes into your pension.

Higher-rate taxpayers can claim more via self-assessment, but that likely doesn’t apply here since you said you pay little tax.

✅ 3. Can you still contribute at 73?

Yes — there is no maximum age for contributing to a pension (unlike before 2015 when it stopped at 75).

However:

Contributions stop receiving tax relief after age 75, so you still have time.

You can only contribute within certain limits (see next point).

✅ 4. How much can you contribute?

You are limited by:

Relevant UK earnings (if you have none, you can still contribute up to £3,600 gross per tax year).

The annual allowance (currently £60,000 gross for most people).

The Money Purchase Annual Allowance (MPAA): If you have accessed any flexible pension income (like drawdown), your allowance for tax-relieved contributions drops to £10,000 gross per year.

For someone like you:

If you have no earned income, you can contribute up to £2,880 net (£3,600 gross) each tax year and still get tax relief.

If you do have earnings, you can contribute up to 100% of those earnings, capped at the annual allowance (usually £60,000 gross).

✅ 5. 25% tax-free lump sum (PCLS)

Yes, if you contribute to a pension and later take benefits (buy an annuity or take drawdown), 25% of the fund can be taken tax-free.

Example:

You pay £2,880 into a pension.

HMRC adds £720 → pot is £3,600.

You could then take £900 tax-free (25%), and use the rest for an annuity or income.

✅ 6. Strategy with your inheritance

You could:

Contribute £2,880 per year (net) into a SIPP (or personal pension) and get £720 tax relief.

If your inheritance is large and you want more tax efficiency, you can repeat this each tax year.

After building this up, you can buy an annuity with that pot, plus take the 25% tax-free lump sum.

Important Caveats

If you’ve triggered MPAA, your limit is £10,000 gross (but only relevant if you have earnings).

No tax relief after age 75, so you have roughly 2 years to do this.

Annuity income itself is taxable (but you said your tax is low, so likely minimal).

✅ Summary Answer:

You cannot get 20% added directly to an annuity purchase. You must first contribute to a pension (like a SIPP). At 73, you can still add £2,880 per year (net) and HMRC will add £720, giving you £3,600 gross. You could then take 25% tax-free and use the rest for an annuity.

Do you want me to:

✔ calculate how much extra you could accumulate by age 75 if you use the maximum allowance each year (with and without growth),

✔ or show a comparison of annuity income now vs after doing this for 2 years?

ChatGPT can make mistakes. Check important info.

I would not have thought that you of all people would have to use Chat GPT to answer tax questions