What are the tax advantages of an annuity?
When looking at retirement investments many people are looking at a way to secure a stable source of income with as little deductions as possible. Although annuities are not a tax free investment options, there are elements of
In general, anything that you have invested into your pension is
How are annuities taxed?
The way that annuities are taxed has changed in recent years as up until 2007 all annuities were taxed at a basic rate (20%) and anyone who earned under this amount would have to fill out a tax refund form. Since 2007, annuities have adapted the same taxation system as regular employees and it now falls under a PAYE (Pay As You Earn) system which taxes the annuitant depending on how much income they receive each year.
In general annuitants will pay a little less tax as the personal threshold increases after the age of 65 from around £8,000 to around £10,500 and this increases again after the age of 75.
Tax free lump sum
One of the main tax benefits of an annuity is the tax free lump sum that you can take before you purchase your annuity. This tax free lump sum can be taken from your pension pot and can total anywhere up to 25% of your total savings. This amount can be withdrawn directly from your pension pot completely tax free and can be used for a wide range of purposes.
Many people choose to use this for a holiday, or perhaps to make a large purchase. In contrast, others may choose to take this 25% and use it as a more high risk investment with the hopes of a higher return than what they could obtain through investing it into an annuity.