What is a purchased life annuity?

Many people purchase annuities with their pension funds to guarantee them a steady income through their retirement. A purchased life annuity (PLA) is similar to an annuity paid from pension income. It pays out a regular sum until death in a similar way to a normal annuity, but it can be purchased with a lump sum from a wide range of sources. For example, you can usually buy a purchased life annuity from the proceeds of your house sale. You could also buy one with the tax free lump sum which you are paid from your pension plan.

Some providers will limit the source of the investment lump sum, but some will not. For example, some providers will not allow you to invest inheritance payments from someone else or money received from someone outside the UK. Most providers will not allow you to buy a purchased life annuity on behalf of someone else, although you can take out a joint purchased life annuity.

A purchased life annuity is a safe place to put your money. It guarantees you a regular monthly income for life, allowing you to plan and budget in the way you are accustomed to.

Who can take out a purchased life annuity?

To buy a purchased life annuity, you will normally have to be more than 50 years old. The minimum permissible investment will vary, but around £30,000 is a reasonable figure as an example. Most providers will have an upper age limit (usually in the 80s) for the purchase of this type of product.

What are the financial benefits of a purchased life annuity?

The growth on a purchased life annuity is usually quite small as providers do not tend to take big risks with your cash. In general, the payouts are smaller than a normal annuity because the people who buy purchased life annuities tend to be people will a clean bill of health. Healthy pensioners live longer and are likely to draw more money from their provider over time – a purchased life annuity takes this into account.

The monthly set amount you receive from a purchased life annuity will also vary according to your age and gender when you buy the plan. It will depend on any protection or insurance you take out at the same time. However, the amount you will receive is fixed and guaranteed for life.

It is possible to joint purchase an annuity – your income is guaranteed for life when you do this, and so is the income of your spouse if you die first.

With a purchased life annuity, your initial lump sum investment is not taxable – the only portion you will pay tax on is the interest accumulated. This makes a purchase life annuity an attractive option for many people. Normal annuity income (purchased from pension funds) are taxed in their entirety at 22% or 40% depending on your circumstances, so the comparative savings can be considerable.

The cost of buying a purchased life annuity will also be deducted from the value of your estate. This makes purchased life annuities a very good option for older people with plenty to invest.

Paying for the cost of care

Purchased life annuities are a very good way for people to provide for the cost of care. For example, when moving into a residential home the fixed monthly repayments can contribute towards, or cover, the cost of your care. This makes a purchase life annuity a good place to invest the proceeds of an equity release scheme or house purchase.

What are the risks of a purchased life annuity?

If you die relatively early, all the capital in your annuity is lost. Some providers do offer the
option to protect against this, though:

• Some providers will guarantee payments for a certain period regardless of death, for example five or 10 years. You will need to pay a premium for this guarantee. The amount paid out from the annuity will be lower overall, but you will be able to enjoy the cash knowing that the whole sum is not lost should you die within the guarantee period.
• Some providers offer capital protection insurance; if you were to pass away very soon after buying your purchased life annuity, your capital sum would be repaid. Normal annuity products do not give you the option of purchasing this kind of protection at all.

Inflation can also affect the return on your purchased life annuity, especially if your income is fixed for the rest of your life. The older you are, the more inflation may eat into the amount you are paid.
It is worth doing a general assessment of your health and life expectancy before entering into a this type of plan. If you have any ongoing health problems, it is essential to seek professional advice before taking out any long term investment products as you may be better off placing your money elsewhere.