Taxation of annuities

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Beenoskee

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I have money in an AVC fund. When I retire I will have the option of using some of this AVC money to buy an annuity. The income from the annuity will be fully taxable. I understand this is because I have received tax relief on the contributions paid into the AVC.

My question is if I purchase an annuity using tax paid money such as savings ( or with a tax free lumpsum) then how is the income from the annuity taxed?
 
Beenoskee said:
I have money in an AVC fund. When I retire I will have the option of using some of this AVC money to buy an annuity. The income from the annuity will be fully taxable. I understand this is because I have received tax relief on the contributions paid into the AVC.
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"Fully taxable" is arguably a bit misleading.
Pension income is generally assessable for income tax under the normal rules.
What tax, if any, is due depends on the size of the income, tax credits/bands etc.
Beenoskee said:
My question is if I purchase an annuity using tax paid money such as savings ( or with a tax free lumpsum) then how is the income from the annuity taxed?
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It makes no difference if you use tax paid savings to invest in the pension. The tax treatment on drawdown is the same.
 
Clubman thanks for the reply but I'm not sure you understood my question.
1. I understand that income from a typical annuity, e.g. purchased using a maturing AVC, is taxable under the normal rules.

2. If I have a tax free lump sum of say €100k and stick it on deposit in a bank I could withdraw say €5,000 a year and obviously pay no tax on my withdrawals. If instead I use the same lump sum to buy an annuity at say 5% then am I liable to pay tax on my €5,000 a year income or do different rules apply?
 
Beenoskee said:
I have money in an AVC fund. When I retire I will have the option of using some of this AVC money to buy an annuity. The income from the annuity will be fully taxable. I understand this is because I have received tax relief on the contributions paid into the AVC.

My question is if I purchase an annuity using tax paid money such as savings ( or with a tax free lumpsum) then how is the income from the annuity taxed?
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If you were to put post tax funds in a purchased life annuity (if anyone still sells them), part of each payment would be considered return of capital and part would be income. The income part is taxed at 20%.
 
Fortune said:
If you were to put post tax funds in a purchased life annuity (if anyone still sells them), part of each payment would be considered return of capital and part would be income. The income part is taxed at 20%.
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The OP asked whether he would be liable to pay tax on the annuity income.

The answer to that question is "yes".
 
Fortune said:
The answer to the question isn't that it's income and taxed accordingly, the answer is that some of it is treated as income and taxed at 20%.
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No, the OP specifically asked whether annuity income was taxable when an annuity was bought with post-tax savings.

You answered a question that wasn’t asked.

Anyhoo, it’s largely academic.
 
In addition to purchasing a Retirement Annuity with their pension fund, the OP is considering purchasing an annuity outside their pension, using savings that have already been subject to tax at source. I gather the latter is referred to as a Purchased Life Annuity (PLA).

@ClubMan what is your reference for the statement that the tax treatment for both Retirement Annuities and PLAs would be the same? Note that OP is not asking about funding their pension contributions from net tax savings.

This sounds plausible to me for OP's situation:
Fortune said:
If you were to put post tax funds in a purchased life annuity (if anyone still sells them), part of each payment would be considered return of capital and part would be income. The income part is taxed at 20%.
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But I cannot find a definitive Revenue reference, as it's an unusual situation (and as Fortune also said, such annuity products may no longer be readily available in Ireland). Although this seems relevant:

No 39 of 1997, Section 788, Revenue Note for Guidance

No 39 of 1997, Section 788, Revenue Note for Guidance
www.charteredaccountants.ie

Certainly, if the annuity payment was a gift or inheritance, it would be taxed in a fairly unique way. So that's a third type of annuity you could receive payments from ...

It seems overly pedantic to pretend that the OPs definition of 'income' in their question on taxation of 'income' excludes the capital portion of the annuity payment. They are obviously aware that true income is assessable for income tax.

Bonus question: it should be possible to use a tax free retirement lump sum to setup a PLA. Should retirees purchasing Retirement Annuities be advised to consider this?
 
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MugsGame said:
It seems overly pedantic to pretend that the OPs definition of 'income' in their question on taxation of 'income' excludes the capital portion of the annuity payment. They are obviously aware that true income is assessable for income tax.
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Completely agree - pretty clear what OP was getting at.

MugsGame said:
Bonus question: it should be possible to use a tax free retirement lump sum to setup a PLA. Should retirees purchasing Retirement Annuities be advised to consider this?
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Are PLAs available in Ireland?
 
But presumably could be purchased somewhere internationally? I suppose you could put lump sum on deposit and pay DIRT on the interest
 
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