A Purchased Life Annuity (PLA) converts a capital sum into income. They are very similar to pension annuities, except that you invest your own money rather than a pension fund.
The before-tax rates for PLAs are slightly less than for pension annuities because insurance companies assume that only people in good health buy voluntary purchase annuities. However PLAs are taxed favourably, so after-tax payments are often higher than pension annuities. HM Revenue and Customs treat part of each PLA payment as a return of the original capital. This is called the capital content and there is no tax to pay on this slice of income. The remainder of each payment is called the interest element and tax is charged at the savings rate of 20%, unless you are a higher rate tax payer in which case you will be liable for higher rate tax.
PLAs have most of the same options as pension annuities e.g. single or joint, guarantee periods, capital protection and levels of escalation. However, whereas pension annuities are for life, it is possible to have a “Temporary Annuity” that pays out for a specified period, e.g. 5 or 10 years.
HM Revenue and Customs treat part of each PLA payment as a return of the original capital, called the capital content and there is no tax to pay on this slice of income. The remainder of each payment is called the interest element and tax is charged at the savings rate of 20%, unless you are a higher rate tax payer in which case you will be liable for higher rate tax.
The examples below are based on a purchase price of £ 10,000 and show the annual rates for different options.