Purchased Life Annuity

There can be occasions when your client’s priority is to generate a tax-efficient guaranteed income. This could be where they want to help fund school or education fees for children or grandchildren, supplement pension income in retirement or help reduce the value of their estate for inheritance tax purposes.

Such circumstances could be where a Purchased Life Annuity is a valuable option. It allows your clients to pay a lump sum and in return receive a guaranteed income payable for a specific term or for the rest of their life.

For tax purposes, part of the income payable is treated as a return of capital and therefore this could provide a higher net income than that available from other comparable investments such as a bank or building society account. The income that they receive will be set at outset and will not fluctuate. Although   it is possible to include indexation, so that the amount of income could increase over the payment period, perhaps to cover the risk of inflation, or increasing income requirements.

Your client can include options to provide some benefit if they die in the early years. A guaranteed payment period means that in the event of them dying, the income will continue for the remainder of the guaranteed period. The Premium Protection option gives their beneficiaries the security of a lump sum equal to the original investment less the income payments that have been paid.

  • Part of the income will be treated as a return of capital and therefore will not be taxable. The amount will depend on your client’s life expectancy, so will increase the older they are.
  • The income payable is fixed at outset and will not change, although it is possible to include an indexation so that the payments increase by a fixed amount of up to 10% each year.
  • The payments you receive can be structured to pay monthly, quarterly, half yearly, yearly or termly – three times a year, to coincide with school fees planning.
  • If two people apply for a joint annuity, such as spouses or civil partners, an income can continue to be paid until the second death, providing security. This continuing income could be reduced, meaning that a higher amount is payable when both are alive, reducing to reflect a possible drop in expenditure.

The income payable is guaranteed and it is not possible to surrender or cash-in the annuity.

You should speak to a professional adviser to ensure that any investment is suitable for you.

The Purchased Life Annuity will appeal to those who have a capital lump sum and are looking to exchange this for a tax-efficient guaranteed income, either for a fixed period of time or for the rest of their life.

The Purchased Life Annuity may be suitable for your clients if:

  • They have a lump sum of cash they would like to use to generate a guaranteed income, either over their lifetime or a fixed term
  • They have utilised their pensions Lifetime Allowance and want to supplement their retirement income
  • They would like to provide an income for a beneficiary
  • They are at least 35 years old

The Purchased Life Annuity may not be appropriate if your client:

  • Wants all of their funds to be accessible immediately
  • Is are looking for a flexible return and do not need a guaranteed income
  • Has less than £10,000 to invest
  • Wants to make regular or one off contributions
  • Wants to withdraw all of their funds immediately in one go.

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"Ryan has recently retired but is finding the state pension inadequate to meet his needs. Sadly Ryan’s father recently died and he has inherited a lump sum."
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This website is for UK professional advisers only and is not approved for use by private customers.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority.

Canada Life International Assurance (Ireland) DAC is authorised and regulated by the Central Bank of Ireland.

Stonehaven UK Limited and MGM Advantage Life Limited, trading as Canada Life, are subsidiaries of The Canada Life Group (U.K.) Limited. Stonehaven UK Ltd is authorised and regulated by the Financial Conduct Authority. MGM Advantage Life Limited is authorised and regulated by the Financial Conduct Authority.