Annuity payments will be calculated according to your age at outset and your life expectancy together with “gilt yields” (which are closely linked to interest rates).
The rationale behind this is that you hope that you will live for many years to come, certainly in excess of the “average” person whereas the insurance company hope that your life expectancy will be lower than average, thereby providing them with a profit.
Purchased life annuities do offer some tax advantages. Firstly, the annuity payments are treated as part interest and part return of capital and as such, income tax is only applied to the interest element. Secondly, if you happen to live for many years so that the annuity income received far outstrips the capital sum paid, there is no capital gains tax to pay. Thirdly, the purchase price of the purchased life annuity will reduce the value of your estate and this will have the effect of reducing your estate for inheritance tax purposes.
When considering purchased life annuities or any kind of tax planning, it is important that this is carried out in conjunction with a suitably qualified and impartial financial adviser who is able to guide you through the process, ensuring that purchased life annuities are the most appropriate course of action for you and making sure that you obtain the best rates on the market at the time.
If you have poor health you may also benefit from an impaired health annuity arrangement. For more information on annuities see our Guide to Annuities.