How are annuities taxed?

by Ryan on March 7, 2013

Stock MarketAt some stage in our lives we have to start planning for retirement. Whether you’re in your 20s and in the best of health, or you’ve just turned 50 and start thinking about a life without having to worry about going to work every day, it’s important to think about how you want to spend your golden years and what you may or may not have to live on.

Many people who have thought about what to do when they retire look at their options. In the US, they can take out a state pension, get a pension through their job or take out an annuity. These options are broadly the same in the UK, but when it comes to issues like tax and payments, there are vast differences which make some options more palatable than others.

Annuities in particular are taxed differently in the two nations. Various factors are used to determine how much of an annuity holder’s income is taxable such as health, previous occupation and, most importantly of all, the actual value of the annuity itself. In the majority of cases, a proportion of each annual annuity payment is taxed.

Annuities in the US
The issue of tax and annuities is complicated, but in the majority of cases, either some or all income from annuities is deemed taxable. In the event that the money paid into an annuity is all from your employer, was deemed tax-free or contributions from your employer weren’t withheld from your salary, then your annuity income is fully-taxable.

If, however, you paid money into your annuity or pension scheme using after-tax income, then your annuity income is only partially taxable. The amount of tax you pay on your annuity depends on how much money you paid into your annuity scheme from your own pocket. For those aged 59½ or less who receive pension payments, they have to pay an extra 10% in tax. Check here for more information.

Annuities in the UK
In the UK, understanding how annuities work is no less complicated. However, like in many other countries, falling annuity rates are becoming commonplace. According to My Pension Expert, annuity rates are in freefall across the globe, and this means the issue of tax takes on more importance than ever.

The majority of annuities in the UK are taxable. Part of the income from an annuity is taxable at around 20% for most people. It’s usually taken from annuity payments before they’re received. Those who pay the basic tax rate don’t have to pay anything else, whereas those why pay a higher rate of tax may have to pay an additional 20%.

Those who didn’t pay tax can either reclaim it by filling in a special R89 form from the annuity provider or tax office or make a gross payment. Those who pay the starting rate of tax can claim up to half their tax deductions back.

Wherever you are in the world, taking out an annuity is a complex process. Choosing the best rates available, working out tax deductions and figuring out how long it will last for are all important.

 

 

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