Short Guide to a Purchased Life Annuity
What is a PLA (Purchased Life Annuity) ?
Put simply a Purchased Life Annuity is any annuity that is based upon your life expectancy, and cannot be classified under any of the other annuity types. The annuity rate offered will be judged upon how old you are when you take out the plan, your life expectancy and gilt yields. So if you are looking for a guaranteed income from a lump sum, a Purchased Life Annuity could be the answer. Because part of the income you get from a PLA is tax free, it is a tax-efficient way to receive benefits from your pension pot. With a PLA you will get an income for the rest of your life, meaning you won’t have to worry about your income running out when you are older.
Also with a Purchased Life Annuity, it may be possible to stipulate that you require an income for a set period of time – as opposed to your actual retirement length. However it should be noted that if you die before this period, payments will cease to be made. The way to get round this scenario is to ensure you gave what is known as “capital protection” – this means that if you have not yet been given payments before tax equal to the amount you originally invested, the balance will be returned if you die before the end of the span of the PLA.
What are the benefits?
A major benefit of a PLA is that part of your income will be tax free. This is because your income is made up of two parts, a ‘capital’ part and an ‘interest’ part. The former is classed as return of your capital so cannot be taxed, resulting in you only paying tax on the interest. Aside from the tax benefits, you could also make a profit on the lump sum you invested if you live for so long that your income payments are more than the lump sum you invested. Any extra money will not be liable for CGT (capital gains tax). You could also save on Inheritance Tax because the price of the annuity will reduce the value of your estate.
What are my options?
The great thing about Purchased Life Annuities is that they are flexible, meaning you can choose many options to taylor the plan to your exact needs. The more options you have, the lesser you income will be at the start. Below are some of the main options, that MAY be available for a Purchased Life Annuity.
-Payment scheduling – this can be every month, every 3 months, bi-annually and annually.
-You can be paid as soon as your annuity is agreed, or in arrears – such as monthly, 3 monthly etc (as above)
- Joint or Single Plans. You can choose to have the payments stop when the first person dies or payments can continue until both people die.
-Payments can increase each year.
FAQ’s of a Purchased Life Annuity
i) I have money that is not from a pension scheme, can I still invest?
Certainly. The upper limit is half a million pounds and the minimum is five thousand pounds. This can be from a property sale, windfall or inheritance.
ii) May I change provider or cash the plan in?
No, once you buy it, that’s it!
iii) If I die what happens?
Payments will cease unless you have a guaranteed period OR you have a Joint Annuity where payments only stop when the last person dies
OR you have protected capital, and have yet to get payments equal to what you invested before tax.
iv) What about inflation?
Inflation is a big danger, especially if there are steep rises.To protect against this you can choose to have fixed increases up to 8.5% per year. However your starting income will be lower.
v) Income guarantee?
Your income will be guaranteed until your death or the agreed span of the plan. Those with a guaranteed period will be paid until the end of the agreed period, even if they die. Should you choose a joint life annuity, an income will be paid until the first person, second person or named person dies (depending on what you agreed). Bear in mind that with any of these options your starting income could be lower.
