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
Smoker

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.

Annuity
 
Pension
 
Guarantee Period
 
Retirement
 
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

 
Someone told me I should consider consolidating my pensions because it makes it cheaper. What is pension...
 
I am an IT contractor with my own limited company contracting into other companies for work. I was wondering...
 
What is an annuity? Is this a popular pension to get in...
 
I am getting myself up to speed with all the changes in the pension legislation in the 2015 Budget and...
Need Help? Live chat now and get an instant answer from our Experts...

Neil
Pensions

Victoria
Insurance
Our Latest Reviews
Robert Eldridge
07/06/2018

Rauri was easy to talk to. Explained everything really well. Took prompt action when requested and was in touch when he said he would be without being pushy.

Attila Mako
07/06/2018

Excellent service. Oliver was very helpful and patient with me. He gave me knowledgeable advise describing the product details clearly. His communication was prompt and precise! Great customer service!

Ian Brett
26/05/2018

Josh made a complicated process easy and I was kept informed throughout. I will be recommending Drewberry to every one who asks and even those who don't.

We are rated 4.9/5 based on 1512 independent client reviews.
To read more of our independent client reviews click here →
REVIEWS
EXCELLENT
4.92 / 5 Average
1638 Reviews
D Gianfreda
Overall Rating
Friendly, efficient and professional service
T Bullock
Overall Rating
Friendly and professional
l kelham
Overall Rating
Excellent service, clear communication and advice
B Weller
Overall Rating
Very thorough service
E Portingale
Overall Rating
I had a short time to ensure I was covered appropriately due to change of circumstances and house move. I required a number of insurance policies for my new situation. I contacted Drewberry Insurance and found that they understood all of my needs and the best way to filter and sift appropriate insurers. They clearly understood the process...made everything very easy online and via telephone and always did as they said they would by actioning everything as and when requested. This took the time and confusion away from becoming insured. Their interaction and communication and explanation of all processes ensured I understood each stage of the process. Will recommend their services to anyone seeking insurance.