Purchased Life Annuity
PLA
You don't have to be retiring or even have reached your intended retirement age to purchase this type of annuity.
Basically, in return for a lump sum payment, a Purchased Life Annuity (PLA) can provide a regular source of guaranteed income.
If you need to pay for a care home, or support your offspring at university, then this could be the option for you.
The level of income is calculated from the amount you pay, taking into account the options you choose, such as single or joint life, and whether or not you wish the income to increase each year or remain level throughout.
It is possible to obtain an income for life or for a fixed period usually between 2 and 20 years - whatever you choose.
Once commenced, all payments are made to either the individual arranging the plan or to the person that they want to provide for.
The basics
If an individual has a lump-sum to invest from a source such as:
- a sale of a house
- sale of shares
- a tax-free lump sum from a pension fund
- bank/building society savings
- an inheritance
- an unexpected windfall
- a maturing life policy
- a redundancy payment
They can convert this into a guaranteed regular income for life, for example to:
- to provide a top-up to any existing pension income; or
- to pay for fees such as those for a retirement home.
Alternatively they may want the annuity for a fixed period of your choice, between 2 to 20 years, perhaps to provide an income:
- until they receive their pension;
- until other investments mature;
- for a child or grandchild at college or university.
Who are they for?
There are usually some conditions applicable, for instance:
- if the person buying the plan is under age 18
- or a limit on any guarantee option for those approaching age 90
but otherwise anyone can buy a Purchased Life Annuity.
How do they work?
Capital and interest
The income paid under a purchased life annuity contains two elements, a capital and an income element. The capital element is treated as a return of the annuitant's original investment and is free from taxation. The income element is taxed as savings income at the current rate of 20% for basic rate taxpayers. Higher rate taxpayers will pay an additional 20% tax.
The amount of capital element paid depends on the age and gender of the annuitant as well as any other benefits attached to the annuity, such as a guaranteed period and if there is any proportion added.
The following examples show the tax free capital paid for ages between 55 and 85, for male and female annuitants assuming the level income is paid monthly in arrears, with no guaranteed period, without proportion and a 50% dependents income as a joint life annuity.
| Tax free capital per £1,000 income | |||||||||||||||||||||||||||||||
| age now | male | female | joint | ||||||||||||||||||||||||||||
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The above table shows that the older the annuitant is when acquiring a purchased life annuity, the higher the capital element and as a result, the lower the tax liability on the income.
Taxation
Under section 656 of the Income and Corporation Taxes Act 1988 (ICTA) part of the income from a purchase life annuity is regarded as a return of capital that is free of tax but the interest element will be taxable.
This means the tax treatment of a purchased life annuity is very favourable when compared to other types of investments including pension annuities. The tax paid depends on the proportion of capital and income paid to the annuitant and insurance companies have agreed these proportions with the Inland Revenue.
For example, a male basic rate taxpayer aged 70 will pay tax on £148 per £1,000 of income compared to a 60 year old that will pay tax on £287 per £1,000.
