Aviva comment on the autumn statement from John Lawson, Head of Policy

Article date: 4 December 2014

People inheriting an annuity, mostly from their spouse, could save up to £10,000 in tax, based on today’s Autumn Statement announcement.

Average annuity inheritors (average purchase price of £38,600, average life expectancy) could save up to £10,000 (assumes female inheritor aged 60) in tax, based on today’s announcement.

Under these new rules, annuity instalments received by a spouse or dependant will be tax free when the main annuitant dies before age 75.

From April 2015, people will have unprecedented choice over how they take their retirement income. Some will choose an annuity, some will choose drawdown and many will use a combination of both options.

Retirement choices

When people are making important choices about whether to take a guaranteed income or a flexible non-guaranteed income, both options should be treated equally from a tax standpoint to avoid skewing people’s decisions for the wrong reasons. For example, someone whose needs are best met with a guaranteed income should not be persuaded to take a non-guaranteed income just because the tax rate on death looks more advantageous.

How much is this worth?

This depends upon the inheritor’s gender, age at which they inherit and whether they live shorter or longer than average. It also depends on the proportion of the original pension they inherit e.g. 50%, 66%, 100% and the marginal tax rate of the inheritor. The tables on the following pages set out the tax saved by the beneficiary by gender, age of inheritance and proportion of pension received. All figures are based on the average annuity purchase price of £38,6001 and average life expectancy of annuitants2. All annuity figures from Money Advice Service (3/12/14)3. Assumes 20% taxpayer.

John Lawson, Head of Policy, Retirement Solutions, Aviva said:

“This is good news and puts annuity tax treatment on the same footing as drawdown. This is important because we were concerned people may have made the wrong choice because one option had a different tax treatment. It also means that spouses who inherit when they are younger, when their partner dies before age 75, could save thousands of pounds in tax.”

Female inheritors

Female inheritors Female inheritor age 60

Percentage inherited

50%

66%

100%

Monthly income inherited

£ 79.00

£ 102.30

£ 150.00

Life expectancy (years)

88.07

88.07

88.07

Period payable for (years)

28.07

28.07

28.07

Amount received (total)

£ 26,610.36

£ 34,458.73

£ 50,526.00

Tax saved (20%)

£ 5,322.07

£ 6,891.75

£ 10,105.20

Female inheritor age 65

Percentage inherited

50%

66%

100%

Monthly income inherited

£ 86.50

£ 111.54

£ 162.00

Life expectancy (years)

88.28

88.28

88.28

Period payable for (years)

23.28

23.28

23.28

Amount received (total)

£ 24,164.64

£ 31,159.81

£ 45,256.32

Tax saved (20%)

£ 4,832.93

£ 6,231.96

£ 9,051.26

Female inheritor age 70

Percentage inherited

50%

66%

100%

Monthly income inherited

£ 99.50

£ 127.38

£ 184.00

Life expectancy (years)

88.64

88.64

88.64

Period payable for (years)

18.64

18.64

18.64

Amount received (total)

£ 22,256.16

£ 28,492.36

£ 41,157.12

Tax saved (20%)

£ 4,451.23

£ 5,698.47

£ 8,231.42

Male inheritors

Male inheritor age 60

Percentage inherited

50%

66%

100%

Monthly income inherited

£ 79.00

£ 102.30

£ 150.00

Life expectancy (years)

85.97

85.97

85.97

Period payable for (years)

25.97

25.97

25.97

Amount received (total)

£ 24,619.56

£ 31,880.77

£ 46,746.00

Tax saved (20%)

£ 4,923.91

£ 6,376.15

£ 9,349.20

Male inheritor age 65

Percentage inherited

50%

66%

100%

Monthly income inherited

£ 86.50

£ 111.54

£ 162.00

Life expectancy (years)

86.3

86.3

86.3

Period payable for (years)

20.3

20.3

20.3

Amount received (total)

£ 21,071.40

£ 27,171.14

£ 39,463.20

Tax saved (20%)

£ 4,214.28

£ 5,434.23

£ 7,892.64

Male inheritor age 70

Percentage inherited

50%

66%

100%

Monthly income inherited

£ 99.50

£ 127.38

£ 184.00

Life expectancy (years)

86.77

86.77

86.77

Period payable for (years)

16.77

16.77

16.77

Amount received (total)

£ 20,023.38

£ 25,633.95

£ 37,028.16

Tax saved (20%)

£ 4,004.68

£ 5,126.79

£ 7,405.63

1https://www.abi.org.uk/~/media/Files/Documents/Publications/Public/2014/Pensions/ABI%20statistics%20Q2%202014%20The%20UK%20retirement%20income%20market%20post%20Budget.pdf
2Average life expectances source: CMI (Continuous Mortality Investigation of the Institute and Faculty of Actuaries)
3Based on annuitants and spouses in good health, not overweight, non-smokers, postcode EH42

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