Tag Archives: Tax Free Lump Sum

Can I Have a Tax Free Annuity?

There is no such as a tax free annuity. However, in a way, everyone can receive a kind of ‘tax free’ annuity, thanks to the tax free lump sum from your pension pot that you can use to purchase an annuity.

Currently you are able to get up to 25% of your pension pot as a tax free lump sum, which can then be used as an annuity fund to invest in an annuity scheme. An annuity scheme turns the lump sum into annual or monthly income during retirement. However, it is important to note that annuity income, which is the income you receive from an annuity provider, is treated as taxable income. This means that although your annuity fund can be tax free, it is not entirely a tax free Annuity, and the income you actually receive from the annuity provider is taxed by HMRC.

The amount is taxed at the appropriate tax band, depending on how much money you receive from the annuity. The annuity provider will deduct the tax before you receive the payment. The fact is that for most pension schemes today – the pension savings need to be converted into an income by investing the money into some investment product. This could be an annuity or an income drawdown plan.

An annuity is where the savings are converted into a regular income and an income drawdown plan is where you withdraw money from the savings as and when you need them. The advantage of an annuity is that although the income is taxed and there is no such thing as a tax free annuity, it is guaranteed for the agreed term of the annuity and you receive it at regular intervals. Depending on the type of annuity you can receive a taxable income for as long as you live, or until the end of a fixed term.

While annuity turns your savings into guaranteed income, income drawdown keeps your savings invested in external investments like stocks and shares, and you can withdraw the money as and when you need additional income. This is also taxable as per the appropriate tax band.

A tax free annuity does not exist in the sense that the income from an annuity is always taxed. However, everybody is entitled to a tax free lump sum from their pension savings which can be used to generate an income during retirement, either through an annuity or through an income drawdown plan.

Are you a Baby Boomer looking for Annuity Solutions?

For baby boomers, retirement is quickly approaching. With retirement, come several questions as to how retirement can be funded, how the lifestyle to which consumers have grown accustomed can be maintained even after the working years have ended. However, there are options available to consumers, including baby boomers that are looking for ways to retire comfortably and quickly. Two of the most prevalently used options available to baby boomers are annuities and equity release schemes, both of which could potentially help consumers retire comfortably and on their terms. Between both of these retirement options, each consumer should be able to find a way to retire that fits their individual and unique needs.

Annuities

There are several different types of annuities available to consumers, each with their own set of advantages and disadvantages.  However, most of them operate similarly in that the consumer trades in their pension savings in return for income that is guaranteed for the rest of their life.  The income is guaranteed and relies most substantially on the pension savings that has been accrued by the consumer. Once the consumer has chosen their annuity, no alterations may be made. That is to say that the consumer needs to ensure that they are making the right decision when they choose their annuity. With so many options available, the choice can be challenging but it can also be worthwhile in that it guarantees a certain level of income for a predetermined period of time, most often the lifetime of the insured.

Equity release

Equity release schemes are another options available to baby boomers, and any other consumers who are nearing their retirement years. Equity release schemes are available to those UK homeowners who are aged 55 or older. The purpose of the scheme is to allow the consumer to receive tax-free cash from the value of their home. This cash can be spent however the consumer sees fit. It works best for those consumers or baby boomers who are looking for a tax-free lump sum to help fund retirement, the ability to release cash whenever most needed, or the freedom to spend cash independently.

Regardless of how baby boomers choose to fund their retirement, whether it be through equity release mortgages, annuities, or other investment strategies, they should always consult with a financial adviser before investing in any particular strategy in order to ensure that the decision is the best one possible for each baby boomer’s individual and unique retirement needs.