What are Purchased Life Annuities?
What are they?
Purchased Life Annuities are similar
to traditional annuities,
the subtle difference is that the investment is not received
directly from a pension
plan (although it could be made from the tax free cash
of a pension plan). Essentially, the
money will be your own to do with whatever you please.
How do they work?
In return for a lump sum paid to the
annuity provider you will receive an income for the rest
of your life. The amount of income that you receive will
be determined by your age at the time you take out the
plan, your gender will also have a bearing along with
the options (escalation,
guarantees, etc) that you choose from the outset.
The income paid is made up of a
return of capital (this is your original investment)
plus growth. The capital element is not taxable. The
amount of growth achieved is very conservative since the
annuity provider only invests in low risk investments so
as to be certain that they can meet their payment
obligations.
Why would you choose to buy a Purchased Life
Annuity (PLA's)?
The income you receive is *guaranteed
by the annuity provider
for the rest of your life (and the life of your partner
if a
joint life annuity is specified) or, in the case of
a term annuity, for a pre-determined period.
*Assumes the company paying the
annuity remains solvent in which case 90% of the
investment would be covered by the investors
compensation scheme. While a UK annuity provider has
never failed such an event cannot be ruled out (Lehman
Brothers, a US Bank, was never expected to fail but did
so in 2007).
Are Purchased Life Annuities (PLA's)
good value?
This will depend on how long you live; the longer you
live the more income you will receive. If you were to
die younger than expected then PLA's could be worse
than simply putting your money in a drawer and
withdrawing a certain amount each month until it is all
gone - this is because once the plan comes to an end (on
death) any of the original capital that is not paid out
is lost to those people that live longer than expected.
The amount of gross income paid from
a PLA is usually less than the equivalent traditional
annuity. This is due to the life expectancy of the
people that make up the "annuity pool"; unlike
compulsory purchase annuities where "pool members"
represent the average person, PLA members tend to be
people in good health and live longer than average.
Since the "pool" must last longer it pays out less from
the outset.
How can you find out how much income
a PLA pays?
Annuities-Online can contact all
providers of Purchased Life Annuities to determine which
company offers the best terms. Please contact us for
your personal illustration.
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