Ryan has recently retired and now receives his state pension. But the money he gets isn’t enough to cover his financial commitments. Sadly, his father passed away and has left Ryan a lump sum of £150,000.
What are Ryan’s objectives?
Ryan wants to use his inheritance to provide an additional regular, guaranteed income for life without paying too much tax.
A tax-efficient way to supplementing retirement income
What does Ryan get?
Ryan’s adviser suggests that he use the £150,000 to buy a Purchased Life Annuity. This will give him the regular, guaranteed income for life that he needs and will help to supplement his state pension.
Part of Ryan’s monthly income isn’t subject to tax as it’s simply a return of the lump sum he invested into the annuity. The remaining part of Ryan’s annuity is subject to basic rate income tax, which is currently 20%. As Ryan is a basic rate taxpayer he has a tax-free personal savings allowance of £1,000 a year, which means he may be able to reclaim the tax paid from HMRC.
On Ryan’s death, the monthly income will stop and no further payments will be due to his estate.
What are the risks?
A policy can't be changed or cashed in once is has been set up.
Tax rates may change in the future and an individual's tax liability depends on their circumstances.
It's important that clients seek advice about protecting their lump sum. This is because the total income they receive might be less than their lump sum if they die shortly after their policy starts.