What is a purchased life annuity?

A purchased life annuity is much the same as a pension annuity, except that it must be paid for with cash, such as savings, a windfall or the 25% cash element of your pension fund.

A purchased life annuity is designed to provide additional income to supplement your final salary pension or pension annuity income, or to provide an income until a pension becomes payable at the national retirement age.

Tax efficient purchase life annuities

Purchased life annuities are very tax efficient, especially for higher rate taxpayers, as only part of the income is taxable. HMRC views part of the purchased life annuity as repayment of the money you originally invested, so this is not liable to income tax. You will only have to pay tax on the portion of your purchase life annuity that is considered to be ‘profit’ or ‘interest’ on your original investment.

Please note, however, that to qualify to be treated in this way for tax purposes, a purchase life annuity must be pre-approved by HMRC.

Why buy a purchased life annuity?

A purchased life annuity is a tax efficient way of turning a lump sum into a regular income for the rest of your life. It may not offer the same returns as other savings or investments, however it does guarantee to pay you a regular income until you die, and to continue to pay your surviving spouse or partner if you have included them in your options.

A purchased life annuity is a popular way to support a grandchild through university, or of paying regular bills, such as nursing home fees by turning life savings into a lifetime of guaranteed income.

As with pension annuities, you could get much less back from a purchase life annuity if you die sooner than expected, although you can agree a minimum payment term that will mean your purchase life annuity continues to pay out to your estate after death for the agreed minimum period.

Finding the best purchased life annuity rates

As a rule, purchased life annuity rates are less than those for pension annuities, because they are generally taken out by younger people in better health. However, as with pension annuities, you may qualify for enhanced annuity rates based on your own health and lifestyle situation.

Annuities4U search through hundreds of purchased life annuity providers to find the best purchase life annuity rates for you. Take a look at our purchase life annuity calculator to see what level of purchased life annuity rates are available to you.