Pension Annuity - Purchased Life Annuity a Less Taxing Option!

A pension annuity is treated as earned income for tax purposes and is therefore taxed at your highest rate of tax when combined with any other income you receive. When looking at your income needs in retirement you should always focus on the net income received after tax as this is what you will have available to spend.

If your main requirement in retirement is for maximum income and you have no immediate need for additional capital, you may wish to consider using all or part of your tax free cash to increase your income by purchasing a Purchased Life Annuity.

A Purchased Life Annuity (PLA) differs from a Pension Annuity in that it can be purchased by anyone. It is not compulsory purchase as is the case with a pension annuity, which has to used to by an annuity from the proceeds of a pension fund.

Because of this the Revenue deem that the purchase of a PLA is paid for out of already taxed capital and they therefore treat the resulting income as a part repayment of capital and interest and only require tax to be paid on the interest element as unearned income.

This means that the net income received from a PLA will be higher than that received from a pension annuity. The amount of increase will depend on the age at which it is purchased and the personal tax rate of the individual. The older the individual and the higher the personal tax rate the larger the increase in net income realised.

It is also possible to include similar options to those provided under a Pension Annuity with the added benefit of being able to include a Capital Protection Option where the initial capital invested, less any gross income paid, can be repaid to the purchaser’s estate on death, which is not available under a Pension Annuity.

The PLA is a very under used option, mainly due to people being reluctant to give up control of the capital, but with current saving interest rates being so low it is certainly worth considering.

In order to see if this option would be beneficial to you it would be necessary to obtain quotes from various annuity companies and calculate the net income you would receive based on your actual personal tax situation to see how it compares to any other form of investment available.

As this option is not a compulsory purchase the decision to buy a PLA can be taken at any time and does not necessarily have to be made at the time of retirement.

Please join me for my next post when I will be looking at the Tax Free Cash.