What is a Purchased Life Annuity?

I like the idea of an annuity providing a stable income during retirement, but I never got around to saving a very big pension pot. Can I use other cash to buy an annuity or are annuities only for people with pensions?

Question asked by Ms R Simone
Compare Top 10 Annuity Rates
Takes approx. 60 seconds
Pension Fund
Date of Birth
Loading your options...
Thank you for using our Quote Tool
If you need some help, just call us!
T: 02084327334
Our in-house Experts are here to provide FREE impartial advice!
Our Experts can answer all your questions
Our Experts can send you more appropriate options based on your personal circumstances

Very important if you are either Self-Employed or a Company Director.

Our online quote tool is good but our Experts are better

Oue Experts have access to far more insurers and can often find a better deal offline.

Saves you time, let our Experts do what they are best at

Answered by Michael Englefield

Annuities are most commonly used by retirees as a way of exchanging their pension pots for a retirement income. This retirement income is paid regularly and lasts until you pass away.

However, annuities aren’t just for people with pension pots. You can also buy an annuity with any lump sum of cash, perhaps from the sale of a house, an inheritance or simply regular savings you’ve built up during your life. This is known as a purchased life annuity (PLA).

Alternatively, you could buy a PLA with your pension commencement lump sum (PCLS), which is the term for the initial 25% of your pension pot you’re entitled to take tax-free at the start of your retirement.

Purchased life annuities have all the same options as an annuity, including:


Tax and Purchased Life Annuities

There are some tax advantages to buying a purchased life annuity. With a pension annuity you have received tax relief on the cash you’ve paid in throughout your working life, so the income from your pension is taxed.

With a purchased life annuity, it’s assumed you’ve paid tax on the cash you’re using to buy the annuity already (e.g. inheritance tax, income tax, capital gains tax etc.). The result is that part of your purchased life annuity isn’t taxable as income. Instead, it’s treated as a tax-free return of the initial capital invested.

A quirk in the rules means that although you can use inheritance to buy a purchased life annuity, a will can’t stipulate outright that the inheritance needs to be used to buy an annuity. If it’s written in a will that you must use your inheritance to buy an annuity, part of the annuity income won’t be treated as a return of capital.

Neil adams, pensions & investments expert at drewberry

Although you say you haven’t built up much in the way of pension savings, most people have a pension allowance of the lower of £40,000 or 100% of their earnings each year. You can also carry forward unused annual allowance from previous years, so you could still have time to contribute to a pension before retirement to get hugely valuable tax relief on your savings.

Doing so would make a regular pension annuity an option at retirement. See how much you can pay into your pension each year and whether you can carry forward unused allowance with our Pension Carry Forward Calculator.

Neil Adams
Pension & Investments Expert at Drewberry

It’s impossible to say what the best course of action is for your retirement without speaking to you and offering financial advice and reviewing your pension savings. To speak to an expert, call Drewberry today on 02084327333.

Guarantee Period
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.
Compare Top 10 Annuity Rates
  Takes approx. 60 seconds
Need help? 
Call us on 

Frequently Asked Pensions Advice Questions

My pension says it has a guaranteed annuity rate, what does this mean and is there anything I should...
I try and keep up with the latest developments but I’m confused about how the new ‘pension...
With all the changes to pensions legislation with the 2015 Budget I wanted to know whether anything has...
I’m approaching retirement and I’m confused about my options. I’ve seen that one possibility...
Need Help? Live chat now and get an instant answer from our Experts...


Our Latest Reviews
Kevin Ballinger

Excellent service. Well documented and prompt meetings arranged, with polite reminders. Good, clear advice and excellent product choice for me. Very pleased and highly recommended.

Kylee Kelly

Jake and Jack and Drewberry were excellent and I would definitely use their services again. We purchased life insurance from them and we are now getting them to look into income protection cover for us. They are very knowledgeable and the set up was a breeze.

Priyadharshini Westphal

Really personalised service. Would definitely recommend. Very helpful and not pushy. Oliver was through and lovely to speak to.

We are rated 4.9/5 based on 1742 independent client reviews.
To read more of our independent client reviews click here →
4.92 / 5 Average
1916 Reviews
Verified Buyer
Overall Rating
The whole process was a pleasure. Drewberry we're easy to deal with, polite, knowledgeable and helpful
Verified Buyer
Overall Rating
Very good, clear service would recommend to friends and family
Overall Rating
Sam Carr provided an efficient and professional service.
Verified Buyer
Overall Rating
Sam Carr provided a professional but enthusiastic service and helped make the whole process very straight forward. Goodness knows I have been through enough application forms recently. My insurance product was never going to be easy to find and I had been rejected on a number of other occasions through others ironically due to well managed common health conditions. I identified Drewberry in a last and disappointing trawl on th web to find someone that actually wanted to take on a difficult case like me. Some brokers wouldn't even consider me. When we applied for my first choice product Sam wasn't at all deterred by the long wait for my GP report or the final rejection that came back from the insurer, sadly I have become used to it. Within a day he had lined up the second choice and to my surprise he had hit the nail on the head and introduced me to the correct insurer and terms for my needs whilst nogotiating an excellent premium. I am extremely satisfied with what Sam has achieved for me and I would have no hesitation in recommending either him or Drewberry to friends, family and and business contacts. In the future, Drewberry will be my first point of contact. Many thanks!
Overall Rating
Tailored to my need and the staff gave very good service