Immediate Vesting Annuity
An Immediate Vesting Annuity, or Immediate Life Annuity allows you to obtain tax relief on your contributions whilst using your capital to generate an income for life. You can take up to a quarter of the fund as a tax free lump sum, with the remainder of the plan being used to purchase an annuity. Immediate Vesting Annuities can be purchased either from savings you have accumulated, or alternatively from pension funds which you have already contributed to.
Tax Treatment of Immediate Vesting Annuities
Upon taking out an Immediate Vesting Annuity, you instantly receive tax relief at the rate of 20%. You then receive a tax free lump sum of 25% of the amount you invested plus the amount given to you in tax relief. The remaining 75% of the pension is immediately vested to purchase an annuity. The resulting annuity is then taxed at your highest marginal rate of income tax as "earned income".
Even if you are a non tax payer, provided you are aged 55 or over and a UK resident, you are still entitled to up to £720 in tax relief if you take out an immediate vesting annuity. If you are a higher rate taxpayer, you will be entitled to more tax relief than this and can claim additional tax relief through your self assessment. You can do this by contributing £2,880 to an immediate vesting annuity. You then receive £720 in tax relief, bringing the contribution amount up to £3,600. Of this, 25% is paid back to you in the form of a tax free lump sum of £900. The remainder of the fund goes to purchase an annuity.
The minimum age before you are eligible to take out an Immediate Vesting Annuity is 55.