Taxation of General Annuities

[Rahul]

For Reference: Page 5 (Chapter 7)

• Premiums are taxable
• Investment earnings are taxed on I-E basis at Basic Rate (say 20%)
• Benefits: Excess of Annuity over policyholder premium component (purchase price of annuity/Expected lifetime of policyholder) is taxed at Marginal Tax Rate (say 40%)

To understand the tax computation better, I would like to state it through an example-

Case: A policyholder (who falls under the Marginal tax rate band of 40%) purchased lifetime - deferred annuity (with 10 years deferred period).

Annual premium paid by policyholder for 10 years is 1,000.

The annual investment income earned on Premium paid net of taxes is 5000, accumulated every year, is taxed on the concept of I-E at basic rate, during the accumulation phase.

After 10 years, suppose this the annuity fund value stands at 15,000.

Ques1: Is this 15,000 (Fund value) net of tax?

Ques2: Is this 15,000 considered as Purchase price of annuity?

Assuming the above two questions are true –

Annual Annuity an vesting date is computed to be 2000 p.a.

Expected Lifetime of policyholder – 10years

Policyholder component = 15000/10 = 1500

Tax would be paid on 2000 – 1500 at Marginal rate (40%)

Ques 3: Isn’t the government charging less tax during accumulation phase(basic rate, 20%) when policyholder is liable to pay marginal rate (40%, which is higher than basic rate)?

Ques 4: if Ques 1 statement is false, won’t the situation fall under double taxation case?

 

[Lindsay Smitherman]

I think you are over-complicating this. A 'general annuity' basically refers to a 'purchased life annuity': an immediate annuity.
A deferred annuity is more likely to have been purchased within (UK) pensions legislation, hence would be part of non-BLAGAB.
[I guess there might have been some non-pensions deferred annuities purchased in the past in the UK, but this feels very obscure and not something that is covered in the Core Reading. If you wanted further information on how those were treated, that is a question for a tax expert - not for the SA2 forum!]