How is an Annuity Taxed?

Could you explain annuities and taxation to me please? I’m approaching retirement and considering an annuity, but I’m not sure what the tax implications will be. How much tax will I pay on my pension if I opt for an annuity?

Question asked by Mr R Stein
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Answered by Michael Englefield

Tax on Retirement Annuities

This is a good question because a lot of people aren’t sure how their pension will be taxed.

Your pension will be taxed differently depending on how you take it (the rules are different for pension drawdown vs an annuity, for example).

However, annuities are treated as income and so most people are familiar with the way they’re taxed – it’s very similar to the way they’ve been taxed on earned income throughout their working lives.

tax treatment of pension annuities

In retirement, just as when you were at work, you get an income tax threshold, known as your personal allowance.

Above this (currently £11,500 in the 2017/18 tax year) you start paying income tax.

The income tax bands are the same as for earned income, rising to 40% for higher rate taxpayers and 45% for additional rate taxpayers.

HMRC’s measure of your income won’t just come from your annuity; it will also be derived from other sources, such as property rentals and all added together to determine your final tax bill.

Tax on Inherited Annuities

If you have an annuity with a guarantee period or a joint annuity, these will continue paying out to a spouse or partner (either for a set period or until your beneficiary’s death, respectively) after your death.

In this instance, if you die before the age of 75 such payments are made free from income tax. If you die after the age of 75, the payments from your inherited annuity will be made subject to income tax at the beneficiary’s marginal rate.

In both instances, the annuity is free from inheritance tax.

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This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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