Spouses inheriting an annuity could save £10,000 in tax says Aviva

3rd December 2014

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

From 6th April next year, ongoing annuity income will be paid tax-free to your spouse or civil partner, if you die before age 75 and had originally bought a joint life annuity.

Julie Hutchison, savings and tax expert at Standard Life says: “We know many of our customers review and plan their finances at a household rather than individual level, so these announcements are great news.  Taken together with the new flexible rules for pensions coming next year, including the way they can be cascaded down the generations in future- this is great news for savers. The framework to resurrect a savings culture is taking shape.”

Insurer Aviva says average annuity inheritors given an average purchase price of £38,600 and average life expectancy) could save up to £10,000 in tax, based on today’s announcement. This assumes the inheritor is aged 60.

How much is this worth?

Aviva says the worth of the change 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 their marginal tax rate. 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 £38,600*1 and average life expectancy of annuitants *2

John Lawson, Head of Policy, Retirement Solutions, Aviva says: “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.”

Aviva says that 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, the firm says 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.

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

 

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