Purchased Life Annuity

What are Purchased Life Annuities and how are they taxed?

See how Purchased Life Annuities (PLAs) provide a guaranteed income normally until death. A single premium product designed to give a guaranteed income payable throughout your lifetime.

Tax is only payable by individuals on the interest content of the annuity.

PLAs are not subject to Finance Act 2004 requirements, meaning annual allowance and lifetime allowance limits do not apply

PLA Taxation

PLA taxation uses the terms; ‘capital element’, an ‘exempt sum’, or an ‘exempt proportion’, depending on the circumstances. The deemed capital element/exempt sum/exempt proportion is free of UK income tax as this is simply a return of the purchaser’s capital.

The remaining portion of each annuity payment is deemed to be taxable savings income.

The approach reflects the amount of exempt capital comprised within each of the annuity payments. In broad terms, the exempt capital amount is obtained by dividing the purchase price of the annuity by the subject’s life expectation, determined according to prescribed mortality tables.

This is often described as a partial exemption scheme.

The term PLA is defined for the purposes of the partial exemption scheme as an annuity granted for consideration in money or money’s worth in the ordinary course of a business of granting annuities on human life, and payable for a term whose length requires the ending of a human life to be taken account of, even though the annuity may in the event end before or even after the life. It includes ‘guaranteed’ and ‘temporary’ annuities.

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