Factor annuity tax into your retirement planning
As you approach retirement, and set the wheels in motion to turn your pension savings into a regular income by buying an annuity, you are entitled to take up to 25% of your pension pot as a tax-free lump sum. However, the regular payments you derive from your annuity are regarded as taxable income, and as such may be subject to annuity tax.
The amount of annuities tax you pay will depend on the amount of annuity income you receive, each year. As with income tax earned during your working life, you will have a personal allowance before any tax on annuities income falls due.
Annuity tax does not only apply to the standard retirement annuity. It will apply to income from the whole range of annuity products.
If you have chosen a guaranteed annuity, which continues to pay your retirement income to your spouse if you die, this may still be subject to annuity tax. The same is true for the escalating fixed rate annuity, and the enhanced annuity, and the impaired life annuity, both designed for smokers and those in imperfect health.
For those who have chosen a variable rate annuity such as a with-profits annuity, where income can vary from year to year, the amount of annuity tax may vary. You can clarify this simply by taking annuity tax advice from one of our qualified specialists at Principle First.
Contact a Principle First annuities adviser to discuss annuity tax on 0800 678 5929 or make an annuities enquiry here.
Allowances before annuity tax is due
The basic amount of income from an annuity, for someone under 65, can run to £6,475 a year, before annuity tax is due.
If you are aged 65-74 you will have a higher personal allowance allowing you annual pension income up to £9,490, before annuities tax is payable.
For those aged 75 or over, the personal allowance rises further to £9,640, before annuity tax is due.
For anyone over 65 whose retirement income exceeds £22,900, special rules apply which reduce the age-related allowances above. For every £2 you receive as income above that level, your tax-free allowance reduces by £1, until it reaches the minimum tax-free allowance of £6,475.
This means that, for example, if you are 66 and have a taxable income of £23,400 – which is £500 over the limit – your age-related allowance against annuity tax would reduce by £250 to £9,240.
If you are 66, and have an income in retirement of £31,900, your income is £9,000 over the limit. This means that your age-related allowance will reduce by £4,500 to become £4,990. However, this is below the basic or minimum allowance, so you will still get the minimum allowance of £6,475.
The rules surrounding the issue of tax on annuities are complex, and everyone’s situation is different. We recommend you make an annuity enquiry to discuss your own liability, and take our annuities tax advice.
Of course, annuity tax is not the only issue relevant to your annuity needs. You can also have annuities explained by one of our specialists, who will be happy to discuss all issues in relation to your annuity choice.
Find out more about how much you may pay in annuity tax. Speak to a Principle First annuities adviser on 0800 678 5929, or make an annuities enquiry here.
