- November 7, 2023
- Posted by: legaleseblogger
- Category: Related News
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Financial Planning: Utilizing a £500K pot to purchase an annuity
When considering the use of a £500K pot to purchase an annuity, it is important to understand the potential implications on the 25% tax free amount. By using the entire pot to purchase an annuity, there may be concerns about losing the 25% tax free amount that is typically associated with pension withdrawals.
In addition to the concerns about the tax free amount, there may also be questions about how the income from the annuity will impact other sources of retirement income, such as the state pension. If the income from the annuity pushes total income over the personal allowance, it could result in additional tax obligations.
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Further to the points mentioned, the annuity you get after taking the tax free 25% will be lower than if you didn’t take the tax free. Either you get 25% tax free and then the ┬ú375k buys the annuity, the monthly receipts are then taxable or the full ┬ú500k buys an annuity – a higher amount which is taxed monthly
You could either use the full £500k to buy an annuity or use £375k to buy the annuity and have £125k paid out as a tax free lump sum.
The annuity income would be taxable.
When you use your entire pot of £500K to buy an annuity, you will not lose your 25% tax-free amount. The tax-free amount is typically taken as a lump sum before purchasing the annuity. So, in your case, you would receive £125K tax-free, and the remaining £375K would be used to purchase the annuity.
The income from the annuity, will be added to your state pension and any other income you have.
If the total income exceeds your personal allowance, which is the amount you can earn before paying income tax, then you may have to pay tax on the annuity income.
Hi /u/lurkee4, based on your post the following pages from our wiki may be relevant:
– https://ukpersonal.finance/lump-sum/
– https://ukpersonal.finance/pensions/
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