You could get a purchased life annuity, with the best pension annuity rates, if available on these pension annuities. A purchased life annuity (PLA) can be used to convert a lump sum of non-pension monies into an income. It works just like a standard conventional annuity by guaranteeing to pay out an income for the rest of your life. Income from a standard annuity is taxed based on the usual income tax rates, but the tax treatment of these PLAs is actually more generous. Since you’re using your own savings to buy the PLA, it’s deemed to be a return of capital and therefore part of the annuity income you get back is tax-free. The remainder of the annuity income is taxed at 20% for basic rate taxpayers and 40% for higher rate taxpayers. The amount of tax-free income depends on the age when you purchase the PLA, and your sex. A 65-year old man will get around £832 tax-free for every £1,000 worth of income with the remaining of the £1,000, £168, taxed at the applicable rate.
The benefit of this little-known rule is to take the 25% tax-free cash lump sum from your own pension plan and use it to purchase a PLA where it will provide a guaranteed annuity income. Once you put your tax-free cash lump sum into a PLA you sacrifice your capital to the annuity provider. If you don’t survive for long in retirement most of your capital will be lost. However, if you do survive long enough in retirement, your PLA will pay out more in total than your original payment. For example, if you purchased a PLA with tax-free cash of £50,000 which pays an annual annuity income of £3,435 (with the best pension annuity rates at the time of 6.87%) you’ll break even after 14.5 years. Any subsequent income you receive will mean you’re getting more out of your annuity than what you paid in. Just make sure the PLA is on competitive annuity rates.