It would be true to say that maximising income in retirement is the aim of almost every client at Investment Sense, and it is certainly ours, we pride ourselves on getting the best possible income level for our clients. Which is why we are proud members of the ‘Offer More Options’ campaign as we believe that wider options leads to greater income.
Many people are now aware of the benefits of shopping about when it comes to buying an Annuity or indeed looking for an Enhanced Annuity as a way of increasing their income in retirement. However, there is another option for those that do not need or want the tax free lump sum from their pension.
Simply using the whole fund to purchase a Conventional Lifetime Annuity may not produce the best net income, that is, after taxation is considered. This is where a Purchased Life Annuity or PLA comes into play.
PLA’s have certainly had a resurgence in recent times with many people who were previously just going to buy a Lifetime Annuity with all of their pension fund now considering the benefits of combining a traditional Lifetime Annuity, purchased with the mandatory 75% of their pension fund and using the tax free lump sum to buy a PLA.
A PLA is purchased using money not held in a pension. However, it shares many of the same characteristics as a Lifetime Annuity:
- Income is guaranteed for life
- Benefits such as a guarantee period or spouse’s pension can be added
- Some providers will take into account medical or lifestyle issues, such as high blood pressure, diabetes or smoking
- The factors affecting the level of income such as age and sex are the same for a PLA as with a Lifetime Annuity
However, and this is the main benefit of a PLA over a Lifetime Annuity, the income you receive is taxed in a more advantageous way. This is the key benefit of a PLA.
HMRC deem part of the income from a PLA to be a return of the capital used to purchase it in the first place; they therefore do not tax this part of the income. This is not the case with a Lifetime Annuity where all the income, above your Personal Allowance, is subject to income tax at 20%, 40% or even 50%.
A personalised illustration will show you the difference in net income between a PLA and a conventional Lifetime Annuity; our advisers are of course happy to obtain an illustration for you.
So when could a PLA be used?
There are a couple of occasions when using a PLA can really make sense.
|1.||When 100% of the pension fund is to be used to buy a Lifetime Annuity and no tax free lump sum is needed.
By combining a Lifetime Annuity with a PLA the net income will be better due to the preferential tax treatment of the PLA when compared to the Lifetime Annuity.
|2.||On many occasions the pension provision of a husband and wife are unbalanced, that is to say one individual, normally the husband, has significantly greater provision that the other.
This can be very inefficient from a taxation perspective with, in this example, the wife having no income to set against her Personal Allowance.
A PLA can help here.
The Lifetime Annuity can be purchased by the husband with the mandatory 75% of the pension fund, he takes the maximum tax free lump sum, and his wife uses this to buy a PLA, in her name, this means the income derived from the PLA will be offset against her previously unused Personal Allowance, saving what could be a substantial amount of Income Tax.
A PLA can also be used by an individual looking to take an income from their investments. Whilst there are disadvantages, for example access to capital is lost, the income derived is often significantly better than from a deposit account and for tax payers the taxation of the PLA is more favourable than a deposit account.
A PLA can be an excellent method of increasing your retirement income, however a word of caution, most online Annuity calculators do not give accurate PLA quotes, especially for those with medical or lifestyle issues, and they can be more complex products than a Lifetime Annuity.
As always, take advice, take time to make decisions and look at all the options, the reward could be a better income that you expected.
Our advisers are of course here to help, contact them today to see how a PLA can help you.
We can be contacted on 0115 933 08445, 0845 074 7778 or by email at firstname.lastname@example.org