Purchased Life Annuity

Video explains the alternative investment for income and the tax advantages of a purchased life annuity that are available from specialist insurers.

Transcript

“Hello again, today my video topic is purchased life annuities. Purchased life annuities: what is a personal life annuity? What is a purchased life annuity? [So] I used two phrases there.

First things first, a PLA, a purchased life annuity means you have bought an annuity. I used the word personal, as well, these are personal annuities. So this is not an annuity that has come from your pension fund, this is not an annuity that has come from your company pension or your private pension. This is [a] personally invested, you bought an annuity, a purchased life annuity.

In plain and simple terms: What you do is you have a lump sum of money to invest: You go to an insurance company, a life insurance company, and say: ‘I would like an annuity please’ and they will ask you if it’s pension or not? You say: ‘no, I want to buy one’. You invest your money, they then give you a guaranteed income for either the rest of your life or it may be at term based annuity where it runs for 5 years or 10 years or something like that. That's what a purchased life annuity is, you invest some money, you get a guaranteed income for a period of for the rest of your life.

I liken this to buying a car where a you have a basic model which is the cheapest and then the more ‘bolt-ons’ and you have: metallic paint, power steering and air-conditioning, turbo-charged, whatever it might be; it becomes more expensive. And that’s the same with an annuity. If you have ‘bolt-ons’: Well, I want it is in joint names, I want a ‘bolt-on’ where its inflation protected, I want a ‘bolt-on’ where there is a death benefit should I pass away early so that you built in little ‘bolt-ons’ which become more expensive; so you're starting annuity income is slightly lower but you’ve built-in security features that suit you. So that is what a purchased life annuity is.

How are they taxed? What tax am I going to pay on purchased life annuity? Right, let's explain some basics of taxation. Remember, you invested a lump sum of money from your savings: that money is already been taxed. You paid income tax when you received it or you may pay tax at the bank or building society or whatever it might be. [So] you've already paid tax, its money that's [already] been taxed.

Do you pay tax on the income that you receive from a purchased life annuity? The answer is ‘yes’, but it's not as unfair as that. What they look at with a purchased life annuity is they base it on when you receive your monthly income from your annuity, some of that ‘income’ is treated as a return of your original capital that you invested and some is deemed as income. So you receive your monthly payment, some of it is capital return to you so no tax is payable, some of it is real income, real taxable income so that element is taxable. So, in plain and simple terms, a purchased life annuity is:

• an annuity that you buy privately
• you invest with a life insurance company
• they offer you a quote they pay you an income for the rest of your life or for a given term
• you may have some bolt on's: I want inflation protection, I want a protected capital sum, I want to death benefit, I want a spouse's benefit etc

And then from a tax perspective, a calculation is worked out actuarially, so it’s done automatically, you don't have to think about this where:

When you receive your income
• part of it will have no tax payable because its capital returned
• part of it will be taxable because that's income, taxable income, investment growth

That's an introduction to purchased life annuities. Thanks very much for watching.”