Placing an inherited lump sum into and annuity

Dazed_and_C0nfused

Albermarle said:

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 

😆. I thought it was a good query to give it a try. 

But obviously it will never be as good as the decades of real intelligence from all the regulars on here!

Bumdle

Many thanks for all the comments and help, you can see that you are talking to a financially illiterate person ! 

 I have inherited £250k + and i thought i could put £100k into a pension fund and convert the fund into an annuity but that does not seem possible. Any thoughts about safe investments apart from the isa route which i will use to its maximum.  No offers of marriage please as i already have a husband !!

Albermarle

Bumdle said:

Many thanks for all the comments and help, you can see that you are talking to a financially illiterate person ! 

 I have inherited £250k + and i thought i could put £100k into a pension fund and convert the fund into an annuity but that does not seem possible. Any thoughts about safe investments apart from the isa route which i will use to its maximum.  No offers of marriage please as i already have a husband !!

There was info in the above posts about buying an annuity without going via a pension, so that would be one possibility.
There is no such thing as 100% safe investments, you take a risk to get the reward.
To be 100% safe you would have to keep it all in savings accounts, although interest rates are dropping slowly.
You might be wise to pay an Independent Financial Advisor considering the large sum involved. Normally they are happy to have a free introductory chat.

Secret2ndAccount

Bumdle said:

... i thought i could put £100k into a pension fund and convert the fund into an annuity ...

I hesitate to suggest this to someone who is not on top of pensions, but you can!
I recently bought an annuity with 100k, and I looked at buying a PLA outside the pension, and a more conventional annuity from inside my pension. I am younger than you, so you would get bigger monthly payments. Here (rounded for simplicity) are the best quotes I received:
Conventional Annuity From Pension
Annual payout £5,000.  Tax £1,000    In pocket: £4,000

Purchased Life Annuity
Annual payout only £4,400.  Lower Tax £352    In pocket: £4,048

So you might find that there is almost no loss for buying via the pension, but you have far more annuity options once the 100k is in the pension. In fact, you would have to pay 133k into the pension. Then you take a tax free lump sum of 33k, and a 100k annuity.
I can already feel the keyboards clicking and the peoppe screaming that you aren't allowed to pay 133k into your pension, but it's very likely that you are.
Rule 1: with no income, you can only receive tax relief on 2,880 each year. True. But you can pay in a non-relievable contribution. You don't get any tax relief. You have to tell the penion company that it's a non-relievable contribution. But it is allowed. With my company, you just tick a box when making a payment in, to say whaether it's eligible for tax relief or not.
Rule 2: You can't pay in more than 60k per year. True, but you can go back 3 years and use your unused allowance, as long as you had any pension open at that time. You say you are in receipt of a pension. Therefore you did have a pension open. Using this year, and a couple of prior years, you easily have the headroom to pay in 133k.

At a rough estimate, at 73, you could be looking at 7k per year, index linked (inflation-proof). If you go for a level annuity, you would start at over 9k per year, but it would gradually fade in value due to inflation. If you have any health issues, the payouts would be larger, and could make annuities a very attractive option.

If you are not yet confused enough, there is another alternative - do it yourself. It's called a gilt ladder. You buy a collection of government bonds. These have a guaranteed payout - a small amount, like interest, twice per year, then a fixed large payback on a set future date. You buy some that pay back in a year, some in 3 years, some in 5 years... It's like a slightly lumpy annuity. It takes a lot of setting up, and a bit of looking after, but it's a safe, reliable source of income. Get back to us if you want to know more.

Bumdle

Yes,, i would love to know more about a “Gilt Ladder” sounds like your capital remains  (unlike an annuity),  it is safe but the income / interest is lower ? I guess its a complicated savings account which is guaranteed by the government. 

Suzycoll

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 can't expand on advice that  others have posted re the financials

My personal opinion - spend all your inheritance whilst you can  😉 

DRS1

Bumdle said:

Yes,, i would love to know more about a “Gilt Ladder” sounds like your capital remains  (unlike an annuity),  it is safe but the income / interest is lower ? I guess its a complicated savings account which is guaranteed by the government. 

You could have a look at this
Gilt Ladder Builder · Streamlit
It has an example gilt ladder for getting 10kpa for 10 years but if you look at the cashflows you will see that your capital vanishes over the course of the 10 years because most of the 10k is made up of the redemption of the gilts you bought at the outset.

And maybe read the bit about why a bond ladder isn't necessarily the best thing.

Cleverer people than me have worked out how a gilt ladder would compare to buying an annuity and think the gilt ladder is better.  But you do need to put in a bit more work to set it up.

poseidon1

Bumdle said:

Yes,, i would love to know more about a “Gilt Ladder” sounds like your capital remains  (unlike an annuity),  it is safe but the income / interest is lower ? I guess its a complicated savings account which is guaranteed by the government. 

The article below explains further

https://www.ii.co.uk/analysis-commentary/building-gilt-ladder-everything-you-need-know-ii534096

You may find the learning curve for you would be far too steep to DIY, so if interested consult a wealth manager who can  ( for a fee) construct one for you. See below example of a service provider in this space - 

https://www.canaccord-wealth.com/our-services/investment-management/fixed-income-investing 

EDIT:

Bear in mind income from gilts is half yearly, so not quite the same frequency as a monthly pension or annuity, if that matters to you.

Secret2ndAccount

Have a look at this web page
https://lategenxer.streamlit.app/Gilt_Ladder
He has written a cool tool which suggests a series of gilts to buy to meet your requirements
I knocked up a quick example. 100k invested to be returned over 17 years. It pays out 6660 in the first year, then a little more each year thereafter.

So the suggestion is you put £12k into TR26, which pays out in March 2026. You use that 12ish k to pay yourself for the first two years. Next up is 6k in T28. That pays out in Oct 2028. And so on - a total of 14 bond holdings to start with. Meanwhile, you are collecting coupon (interest) payments on all of them every 6 months. Every little helps.
Note that the money is all gone after 17 years (or whatever duration you design) . An annuity pays out for as long as you live. As you noted, if you want to get your money back, you should be able to sell your remaining bonds for more or less fair value.
This is the equivalent of putting the money in the bank, and living off the interest and principal. You can't get a 15 year fixed interest savings account though, whereas you can get a bond with a known return. It's a bit of work to set up, but once it's set you can largely leave it alone.

DRS1

Interesting that the ladder created by @Secret2ndAccount is made up of Index Linked Gilts.  Sensible when spreading it over 17 years but an added level of complexity (and a long phone call buying them all).  I wonder what the cashflow page for that ladder looks like.