Description

A lump sum investment with a life company, which provides a tax-efficient, guaranteed income.

Examples of Use

Taxpayers who require a fixed income from capital in a tax-efficient form guaranteed for a specified period or the life of the annuitant (or spouse, if taken out as a joint annuity) but don’t need access to the capital.

Advantages

• Annuity payments are treated as part return of capital and part income. The capital portion is not taxable.
• If the annuitant is not a taxpayer, payments can be made gross of income tax (no income tax is deducted).
• Payments are guaranteed

Disadvantages

• It is usually not possible for the purchaser to cash in the annuity once purchased.
• Payments in real terms decrease with inflation, unless the annuity is escalating or unit-linked, and may affect eligibility for means-tested social security benefits, and age allowance.

Points of Interest

• The income element of annuity payments is subject to the basic and higher rates of income tax and in most instances the Life Company deducts basic rate tax at source. Therefore the net income received could vary if tax rates change.
• Unless a capital protected annuity is purchased, the ‘unused’ capital will not be returned on death.
• Capital protection is not available in certain circumstances
• It is essential that with such a complex area an Independent Financial Adviser is consulted.