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29 November 2019 last updated

Cash annuity up to 14pc more income than pensions at retirement
Purchased life annuity better value
  A purchased life annuity offers higher income than a pension with generous tax advantages
 
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Using cash to buy a purchased life annuity produces up to 14% more gross income than a pension annuity before taking account of the generous tax advantages.

The significant fall in pension annuity rates across the board of -13.35% during 2019 has not impacted cash annuities. The purchased life annuity (PLA) allows someone with their tax free lump sum from a pension fund or cash in the bank to buy a lifetime annuity.

As rates have remained unchanged compared to providers of pension annuities the income can be significantly higher especially as the majority of income from the PLA is tax free.

Annual gross income from annuities
Age Pension Cash Increase
55 £3,640 £4,160 £520
60 £4,073 £4,520 £447
65 £4,827 £5,140 £313
70 £5,573 £5,910 £337
75 £6,572 £6,900 £328
80 £8,650 £8,750 £100


The table above shows the difference in annuity rates for pensions and cash for different ages based on a fund of £100,000 buying an annuity on a single life, no guaranteed period and level basis.

The biggest difference is for those aged 55 where pension income is £3,640 pa and with a cash annuity this increases 14.2% or an extra £520 pa to £4,160 pa.

For a 65 the difference is smaller with pension income of £4,827 pa and a cash annuity 6.4% higher or an extra £313 pa to £5,140 pa.

Reducing Income Tax

The purchased life annuity benefits from reduced income tax as HMRC deem the majority of the income as a return of capital and therefore tax free.

For many people at retirement a combination of State pension, company pension or rental income results in paying basic rate tax on any surplus income from private pensions.

By using the tax free lump sum to buy a purchased life annuity you can maximise your income by having this portion of the annuity free from tax.

For example, a 55 year old basic rate taxpayer with a pension fund of £200,000 can use the full fund to provide a pension annuity of £7,280 pa gross or £5,824 pa net.

By using the tax free lump sum of £50,000 to buy a purchased life annuity the income would be £2,080 pa gross or £2,003 pa net with a reduced pension income of £5,460 pa gross or £4,368 pa net.

This combination of pension and cash annuity gives an income of £6,371 pa net or £547 pa net more than the pension income.

In terms of total income during their life, the Office of National Statistics (ONS) would expect a male to live for 26.9 years and he will have £14,714 more income over his lifetime. For a female she can expected to live for 29.7 years increasing her lifetime income by £16,245.

For older wealthier people retiring with both pension and cash funds, the use of a purchased life annuity could result in adding significant amounts of tax free income. This leaves a substantial pension in drawdown outside of your estate offering you flexible income and options for your beneficiaries.

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Annuity Rates
  Age Single Joint  
  55 £3,947 £3,702  
  60 £4,391 £4,052  
  65 £5,098 £4,638  
  70 £6,055 £5,457  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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