Comparison · Retirement · 2026/27
Purchased Life Annuity vs Pension Annuity UK 2026: Tax Treatment Compared
Both products convert a lump sum into a guaranteed income for life, but the tax rules are very different. A Purchased Life Annuity (PLA) is bought with your own already-taxed savings, so part of each payment is a tax-free return of your capital. A pension annuity is bought with pension funds, so the whole income is taxable. Here is how they compare for 2026/27.
TL;DR - 30-Second Summary
- - Purchased Life Annuity: bought with your own savings; part capital (tax-free), part interest (taxable)
- - Pension annuity: bought with pension funds after any tax-free lump sum; 100% of the income is taxable
- - No annual allowance interaction: a PLA sits entirely outside pension rules, so it never touches the £60,000 annual allowance or the MPAA
Side by Side: PLA vs Pension Annuity
| Feature | Purchased Life Annuity | Pension Annuity |
|---|---|---|
| Source of funds | Already-taxed savings, investments or a lump sum | Uncrystallised pension pot |
| Tax on income | Split: capital element tax-free, interest element taxable | Fully taxable as income |
| Upfront tax-free lump sum | Not applicable — no pension lump sum rules apply | Up to 25%, capped by the £268,275 Lump Sum Allowance (2026/27) |
| Annual allowance interaction | None | Triggers Money Purchase Annual Allowance (£10,000) if flexibly accessed elsewhere |
| Typical buyer | Retiree with savings/downsizing proceeds wanting guaranteed income | Retiree converting a pension pot at or after retirement |
Who Should Choose What?
Consider a Purchased Life Annuity if...
- - You have savings or investment capital outside any pension wrapper
- - You want part of your annuity income to be tax-free
- - You have already used up your pension tax-free lump sum
Consider a pension annuity if...
- - You are converting an existing pension pot into income
- - You want to take a 25% tax-free lump sum first
- - You value the FSCS and pension-specific protections attached to your scheme
Frequently Asked Questions
What is a Purchased Life Annuity (PLA)?
A Purchased Life Annuity is an annuity you buy with money that has already been taxed — typically savings, an inheritance or the proceeds of an investment — rather than money from a pension pot. In return for a lump sum, an insurer pays you a guaranteed income for life or a fixed term.
How is a PLA taxed differently from a pension annuity?
HMRC treats part of every PLA payment as a return of your own capital (tax-free) and part as interest (taxable). The split is fixed for the life of the policy using HMRC's actuarial tables at outset. A pension annuity, by contrast, is bought with money that has already had tax relief on the way in, so the whole income is taxable when it comes out.
Is a pension annuity income taxed in full?
Yes. Once you have taken any tax-free pension lump sum (up to 25% of the pot, subject to the Lump Sum Allowance of £268,275 for 2026/27), every payment from the pension annuity itself is taxed as income at your marginal rate through PAYE.
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Who typically buys a Purchased Life Annuity?
PLAs are a niche product, usually bought by retirees who have savings or investment capital outside a pension and want a guaranteed income stream, often for inheritance tax planning or simply to convert a lump sum into predictable income without pension rules or the Money Purchase Annual Allowance applying.
Does buying a PLA affect my pension annual allowance?
No. Because a PLA is not a pension product, it has no interaction with the £60,000 (2026/27) annual allowance or the Money Purchase Annual Allowance. You can buy one alongside continuing to pay into a pension without restriction.
Can I get a Purchased Life Annuity income tax-free?
Not entirely, but the capital element can be substantial for older annuitants, since HMRC assumes a shorter remaining life expectancy and treats more of each payment as capital return. Only the interest element is taxable, so the effective tax rate on the total payment is usually lower than on a fully taxable pension annuity.
Which pays a higher headline income, a PLA or a pension annuity?
Headline rates are broadly similar for the same age, sum invested and annuity type, since both are priced on similar mortality and interest rate assumptions. The real difference is the after-tax income, where a PLA usually comes out ahead for a non-pension lump sum because part of each payment escapes tax altogether.
Should I use pension money or savings money to buy an annuity?
If you are drawing pension benefits anyway, a pension annuity is usually the natural route for that money. If you have separate savings or investment capital you want to turn into guaranteed income — for example after downsizing your home — a Purchased Life Annuity can be more tax-efficient than withdrawing the capital and buying a pension annuity with it, since it avoids un-crystallising money that has no pension tax relief attached.
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Disclaimer: This is educational information, not financial or tax advice. Annuity tax treatment depends on your individual circumstances — always check the current rules at gov.uk/tax-on-pension and get regulated financial advice before buying an annuity.
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