Tax and Annuities

Annuities are deemed to consist of elements of both interest and capital. The amount of tax-free capital in each annual payment (which is not liable to tax) was fixed in 1996 at a rate depending on age and sex. The taxable content of an immediate annuity is easily deduced from Table 20.

Table 20 Capital element of an immediate annuity with purchase price of £111 ,000.

Age last birthday Male Female

£1 £1

45 33.00 29.00

50 38.64 33.36

55 46.09 39.06

60 56.27 46.74

65 70.49 57.36

70 90.71 72.40

75 119.79 94.16

80 162.00 126.28

Example 28

Mr East is aged 71 and invests £17,000 in an immediate annuity. The annual payment he receives gross is £111,390. Of this, £1670 is capital and not liable to tax. He is therefore liable to income tax on £1720.

The capital content of the annuity payment increases with age, but is lower for women of a given age than for men of the same age because of women's greater longevity.

If an annuitant is liable to income tax he will be asked to complete an Inland Revenue form PLAN. Provided that the annuity conforms with the rules the insurance company will be permitted to deduct income tax at the basic rate on the interest content only. Until the completed form is returned to the company, it is, however, required to deduct tax at the basic rate on the whole of the annuity. The annuitant must account separately to the Inland Revenue for any higher-rate tax or investment income surcharge which may be due on the interest content.

If the annuitant's income (including the interest content of the annuity) is so low that he or she will not be liable to income tax, application may be made through Inland Revenue form R87 for the company to pay without deduction of tax.


Further Information: Tax and Annuities

Deferred Annuities

We have already encountered the deferred annuity in personal pension plans. The deferred annuity is payable at some date, and may be purchased either by regular premiums or by a single payment. The rate of future income payable under a deferred annuity is normally fixed at the time of purchase. The buyer therefore stands to lose if interest rates are higher at the time when the annuity becomes payable than they were when he made the purchase. The converse also applies, since if interest rates are lower when the annuity becomes payable he will have acquired a higher rate of income through the deferred... see: Deferred Annuities


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