AS THE PARAGR DISCUSSES, THE BLAGAB TAXATION OF ANNUITIES, I WILL GIVE AN EXAMPLE AS I UNDERSTAND IT, AND IT WOULD BE HELPFULL IF YOU COULD REVIEW THIS EXAMPLE: A MALE AGED 78, WITH LIFE EXPECTATION OF 10 YEARS, BUYS AN IMMEDIATE ANNUITY WITH LUMP SUM OF 100,000. THE CAPITAL CONTENT IS THE 833.33 (WHICH IS 100000 / 120), IF WE ARE SPEAKING OF FIXED (NON INDEXED LINKED) INTEREST OF 3%, THE ANNUITY WILL BE AROUND 966 (BASED OF ANNUITY FACTOR AROUND 103.56). 1. FIRST OF ALL THE ANNUITANT WILL PAY TAX ON 966-833=133 PER MONTH (20%). 2. LETS ASSUME THAT THE COMPANY EARNED 4% (INSTEAD OF 3%), SO THE QUESTION IS HOW THE TAX WILL BE CALCULATED FOR THE COMPANY? 3. LETS ASSUME ALL THE ASSUMPTIONS ARE SIMILAR EXCEPT THAT THE ANNUITY IS: a. UNIT LINKED b. WITH PROFIT. HOW WILL THE INSURED AND THE COMPANY PAY TAX FOR a. AND b.? THANKS AHEAD
Hi losha In your example, the annuitant will pay "income tax" if applicable on the payments they receive in excess of the capital, so your 133/month. The insurer would get to include the income component in it's E element of the BLAGAB tax calculation, reducing it's tax by 133/month. If we assume that the company just held the assets backing this single policy and incurred no other expenses and is a mutual (this is a very simplified example!) then the company has income of 4% x (100,000 - 966 x 6) = 3768 (I'm assuming here that the insurer has paid half a year's worth of payments out of the initial premium). If the expenses just include the 133/month mentioned above, that will be 133x12 = 1596 over the year. In this example I is greater than E. The insurer will pay tax on I-E, 3768 - 1596 = 2172 at the appropriate tax rate (the policyholder rate for a mutual, corporation tax rate for a proprietary). For a proprietary company, we would need to compare I-E to the BLAGAB surplus calculation as outlined in section 5, before we could determine the tax payable. With-profits policies are out of the scope of SA1. But they work in a very similar way to that outlined above splitting profit between the "policyholder" and "shareholder" pots. Unit-linked policies are also outside the scope of the course. Hope this helps. Thanks Sarah
