Chapter 10 - Annuities
An annuity is an annual income, which may be for a period or for life. How much you get for a given purchase price depends on your age, health and how long you want to be sure of payment if you die early. If you buy one which has no guaranteed minimum payment period, it ceases to pay you on death. It is possible to make an immediate Inheritance Tax saving and protect your estate by buying an annuity and using the income to pay for the whole of life insurance.
The purchase price of the annuity comes out of your taxable estate so you get tax relief (from IHT) at 40% of the purchase price.
If you use the income for a whole of life insurance you will often find that the insured sum is much greater than the purchase price of the annuity.
| Example | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Doris has an estate worth £1 million and an IHT nil-rate band of £325,000. Without action, £675,000 will be taxed at 40% which is £270,000. She buys an annuity of £5,400 (net of income tax) a year for £100,000 which therefore reduces her estate to £100,000. The income buys a whole of life insurance with a death benefit of £230,000 which she puts in trust. She dies soon afterwards.
|
This arrangement has solved the IHT at a cost of £100,000, saving £270,000 of tax – a profit of £170,000.
The big advantage of this scheme is that the purchase price of the annuity comes off the value of your estate immediately – while the life insurance pays out to your beneficiaries with no IHT (or other tax).
If nothing is done, the beneficiaries get £730,000 (£1 million – £270,000). However, by following this strategy £230,000 is paid by the policyso beneficiaries get £900,000.
Care must be taken to avoid anti avoidance rules to do with “associated operations” so make sure the annuity and whole of life insurance are bought from different insurers, and as always seek advice from a suitably qualified financial adviser.
