A purchased life annuity is one where you buy an annuity from your own funds. The reason these purchased life annuity are so popular is because they are tax efficient.
As with all taxes they have to be claimed, they are not given automatically. If you do not claim them you do not get them and that would eliminate the tax effecient status of them.
With purchased life annuities the capital element is treated as a return of your original investment and is tax free. The income element is taxed as savings income at a 20% rate of tax for basic rate taxpayers. Higher rate taxpayers will have to pay a further 20% tax.
The amount of capital element depends on your age and sex as well as the other benefits attached to the annuity. For example a 65 year old male would get £832 of every £1000 as return of capital, where an 85 year old male would get £971. Both 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 on purchased life annuities
If you’ve got a purchased life annuity, 20 per cent tax will be automatically deducted from the income element you receive from it by the annuity provider. However if your overall level of income means you’re not a taxpayer you can ask to receive purchased life annuity income tax-free. Use form R89 to do this.