Purchased life annuities
Purchased life annuities are financial products purchased with a capital sum. They are designed to provide a guaranteed annual sum – normally for life, but it could be for a shorter term.
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The elements of purchased life annuities
Payments from a purchased life annuity comprise two separate elements:
- A capital element. This is a return of part of the original capital used to purchase the annuity and is free from tax.
- An income element. This is treated as savings income and is paid net of basic rate tax (20%).
Each year you should receive a statement showing the total sum paid to you, that is, the capital amount (non-taxable), the income amount (taxable) and the tax deducted.
Tax liability on the income element
The final amount of tax due on your income from a purchased life annuity will depend on your situation.
You may have paid the correct amount of tax and not need to take any action. However, you may need to pay more tax if the income amount falls into the higher rate of tax. You may have to complete a self assessment tax return, or it may be possible for HMRC to collect the tax by adjusting your PAYE code on other pension income.
If you are due a refund
You may be able to claim a repayment of some or all of the tax deducted at source, if it falls within your tax allowances or the savings nil rates.
Receiving annuities gross
If your total taxable income is less than your personal allowance, you can ask to receive your purchased life annuity income gross – this means without tax being deducted from it.
This can be done by completing form R89 (Application to receive an annuity without tax taken off), available on GOV.UK.