Purchased Life Annuities
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.
PLAs have most of the same options e.g. single or joint, guarantee periods
and levels of escalation.
The advantages of Purchased Life Annuities
- Higher income that form cash or deposit accounts*
- Reduced tax - tax only paid on part of each income payment
- Especially suited to older investors
- Guaranteed income payments
- Can be single or joint life
- Minimum purchase £ 5,000 no maximum
- Enhanced rates for those with below average life expectancy
* Annuities provided a high level of income because they convert capital into income. This means that when you die there is no return of capital, but on the other hand the payments continue until you die, even if you live to be 100.
Who should consider purchasing a PLA
- Those aged 65 and above and who want to maximise their income
- You can use your tax free cash sum from your pension to purchase a PLA
and thereby increase your net income
- over the age of 65
- Higher rate tax payers
- To fund life assurance policies - e.g. for IHT planning
Taxation of PLAs
- The Inland Revenue treat part of each payment as return of the
original capital and do not charge tax on this part which is called the
capital content.
- Tax is only paid on the interest element and its charged at the savings
rate of 20% unless you are a higher rate tax payer.
The gross rates for PLA's is slightly less than for pension annuities
because insurance companies believe that only people in good health would
voluntarily buy annuities. However the net rate after tax is much higher
than a pension annuity