Purchased life annuity Guide Part 2

Increasing or escalating annuity
Some offices offer increasing annuities, where the instalments increase by a fixed percentage each year. This can help to offset the effects of inflation, although the rate of inflation may well be higher than the fixed rate of increase. You should also remember that a level annuity will be much higher for the same premium than the initial level of an increasing annuity.

A few offices have annuities linked to the Retail Price Index. Unit-linked annuities are also available and three offices have an annuity linked to their with-profits funds. All these types of annuity give a lower initial payment than a fixed annuity, but better protection against future inflation.

Impaired life annuity
In the past, annuities were almost always written at standard rates that did not vary according to the policyholders’ state of health. In a growing number of cases, a person in poor health may be given an enhanced return by certain insurance companies. These are called ‘impaired life annuities’.

Tax treatment of annuities
There is no tax relief for the cost of the annuity. Each receipt from a life annuity is treated partly as a return of the amount paid for it (the capital element) and partly as interest (the income element). Any capital element is tax free but the income element is liable to income tax in full and is usually paid after deduction of basic rate income tax, which can be reclaimed by non taxpayers.