Commercial

Onlineshares Quote Line

0845 108 0505

• Home
• Mortgages
• Investments
• Banking
• Savings
• Pensions
• Car Finance

Commercial

Annuities
These are investments offered by insurance companies whereby you swap a lump sum for a regular income. You cannot get your original investment back as a lump sum, though you are treated as if part of each income payment is in fact a bit of your original capital coming back. Annuities can be for life ('lifetime annuity') or for a set period of years ('temporary annuity'). Pensions from money purchase pension schemes and plans) are usually a type of lifetime annuity ('compulsory purchase annuity'). Non-pension annuities are called 'purchased annuities'.

Minimum investment varies, but you would usually pay thousands of pounds for a lifetime annuity.

Maximum investment None. Type of return Income, which can be fixed or can increase each year either by a fixed percentage or in line with prices, you decide on the type of return at the time you invest. You can also choose annuities which guarantee to pay out for a fixed period, e.g., five or ten years, even if you die during that period.

The return from lifetime annuities depends heavily on the average life expectancy for someone of your age, so rates are generally higher the older you are and are higher for men than for women. Tax treatment With the exception of annuities used to provide a pension, part of each regular payment is deemed to be the return of part of your capital and is tax-free. The remaining part is income, which is usually paid with tax at the savings rate already deducted, but you may be able to arrange to have it paid gross if you are a non-taxpayer (if not, you can reclaim the tax).

Starting-rate taxpayers can reclaim part of the tax. Basic-rate taxpayers have no further tax to pay. Higher-rate taxpayers must pay extra. The whole of the income from a pension annuity is taxable at your top rate of income tax and is generally paid with the correct amount of tax deducted using the PAYE system. How long you invest for A lifetime annuity is literally for life: having made your decision to invest, you have no chance to reverse it.

Temporary annuities are for set periods: for example, five years. You are committed to investing for the full period and cannot get your capital back as a lump sum.

The insurance company's costs are one factor determining the annuity rates on offer.

Risk - No access to your capital as a lump sum once you have invested. Annuities with no built-in increases are vulnerable to inflation: you are locked in at whatever annuity rates apply at the time you invest, and you will lose out if annuity rates subsequently rise. (However, the trend in recent years has been for annuity rates to fall.) Risk rating: around four for annuities paying a fixed income; around three for annuities which provide some protection against inflation.

Back to advice >>