Purchased Life Annuities

Retirement income planning is no longer just about pensions. Many clients hold significant wealth outside their pension wrappers in cash, maturing bonds, GIAs, ISAs or property proceeds. Purchased Life Annuities (PLAs) can turn this non‑pension capital into reliable, tax‑efficient income, complementing drawdown and pension annuities as part of a broader retirement toolkit.

PLAs provide a guaranteed income for life (or a fixed term), purchased with non‑pension money. Each payment is treated as a mix of interest and return of capital, which can make them particularly attractive for clients looking to improve net‑of‑tax outcomes whilst securing part of their spending.

What is a Purchased Life Annuity?

A PLA is bought using money that is already outside the pension environment. In return, the client receives:

• A guaranteed regular income, for life or a specified term
• A portion of each payment typically treated as a tax‑free return of capital

This structure means that, for the right clients, PLAs can compare favourably with interest from bank deposits or bond funds, particularly where personal allowances and dividend allowances are already largely used.

Where PLAs fit in a modern retirement strategy

Turning surplus cash into purposeful income

Many retired clients sit on large cash balances or low‑yielding investments because they value certainty. PLAs offer a way to:

• Move from idle or under‑performing cash to a guaranteed income stream
• Provide clarity over a baseline level of income for life or for a chosen term
• Reduce the drag of inflation and low interest on long‑term cash holdings

This can be especially useful where clients have completed their pension planning, but still need predictable, tax‑aware income from non‑pension capital.

Supporting the essentials / lifestyle / legacy framework

PLAs can play a clear role within a simple bucket structure:

• Essentials: Combine state pension, DB income, pension annuities and PLAs to cover ongoing core expenditure. PLAs are particularly relevant where pension wrappers alone are not enough to secure the required level of guaranteed income.
• Lifestyle: Use PLAs to underpin a portion of discretionary spending, freeing other assets (drawdown, ISAs, GIAs) to be invested for growth, knowing that part of lifestyle income is already secured.
• Legacy: Reserve pension funds, ISAs or property for longer‑term legacy goals, whilst using PLAs to generate the income needed today from capital that might otherwise sit unproductively.

Balancing tax, flexibility and certainty

Because PLAs are purchased with after‑tax money, they sit outside the pension tax regime. Their tax treatment can help:

• Smooth total taxable income in later life
• Reduce reliance on additional pension withdrawals that may trigger higher tax bands
• Provide an alternative to simply taking more from drawdown when clients want additional secure income

At the same time, advisers can control how much capital is committed to a PLA versus how much remains accessible elsewhere, allowing a measured balance between certainty and flexibility.

Benefits for advisers and clients

For advisers, PLAs provide: 

• A way to address under‑used non‑pension capital with a clear income purpose
• Additional levers to manage clients’ overall tax position in retirement
• A stronger evidential trail that foreseeable income risks are being managed across all wrappers, not just pensions

For clients, they offer:

• Guaranteed, predictable income from money that might otherwise sit in cash
• Potentially attractive net‑of‑tax outcomes compared with traditional interest‑bearing assets
• Greater confidence that their day‑to‑day spending is supported by secure, long‑term income

Used alongside Lifetime Annuities, Fixed Term Income Plans and drawdown, PLAs help transform a collection of accounts and assets into a coherent, outcome‑focused retirement income strategy.