Tax on pension income and annuity income

Hi,

I have two questions:

1) In 1997 tax free advantage for dividend income for pension fund was withdrawn. Does that mean pension income is being charged twice (once on dividend income and once on the pension received)?

2) For purchased annuity, policyholders only pay tax on the income content. How does this work in real life? Say I purchase an annuity that pays me £1000 a year and £200 is capital content. Do I receive £1000-£800x0.2 = £840 from insurance company? or do I receive £1000 and have to file tax return?

how will this show on the statement sent to policyholder?


Thank you

 

Hi

From my understanding

1. I believe that pension funds per 1997 were able to claim back the tax paid by corporations prior to issuing a dividend. Effectively meaning that all returns made by pension funds were gross of tax.

2. In real life I would imagine this would mean the annuitant would receive 200 + (1000 - 200) * 0.8 = 840, which ties up with the figure you have. (assuming their marginal tax rate is 20%)

I don't know how this would be illustrated to the policyholder so perhaps somebody with knowledge of that could respond...?

Any queries welcome.

 

I understand what happens pre1997. My question is after 1997 return made in pension fund is taxed, and when policyholders receive pension income, they are taxed again, it seems to me they are taxed twice?

can anyone explain? thanks

Is this really how it works? I will be upset if I was told I will receive £1000 but end up only receive £840


Can someone confirm these please?

Thank you very much

 

It will be very clear in the quote that a portion of the annuity is subject to tax at the marginal rate.

Also, this is the situation with compulsory annuities. For example, you get a quote for an annuity with your pension pot of £1000 a month, but it will make it clear that this figure is subject to PAYE deductions.

 

Post 1997 - the return made on the non dividend based income rolls up gross. On dividend based income the return received by the pension fund has been franked (tax was paid by the corporation who would have paid out the dividend).

The apparent 'quirk' is a function of the tax rules. The point is true for practically everything. You work and earn a salary, which is deducted for tax. When you make a purchase, you pay VAT etc etc. The list goes on...