Purchased Life Annuity (PLA) Rates Calculator
Calculation Results
Total Annual Gross Income:
Capital Element (Tax-Free):
Interest Element (Taxable):
Tax Payable:
Net Annual Income:
Understanding Purchased Life Annuities (PLA)
A Purchased Life Annuity (PLA) is a financial product typically bought with a lump sum of non-pension capital (such as savings, inheritance, or the proceeds from a house sale). Unlike a standard pension annuity, which is taxed as earned income in its entirety, a PLA receives highly favorable tax treatment.
The core advantage of a PLA is that the tax office recognizes that a portion of the payments you receive is simply the return of your original capital. This portion is known as the Capital Element and is completely tax-free. Only the remainder—the Interest Element—is subject to income tax.
Realistic Example:
If a 70-year-old invests 100,000 in a PLA with a gross rate of 7%, they receive 7,000 annually. Based on actuarial tables, the tax office might determine that 5,500 of that 7,000 is a return of capital. Therefore, the individual only pays income tax on the remaining 1,500.
If a 70-year-old invests 100,000 in a PLA with a gross rate of 7%, they receive 7,000 annually. Based on actuarial tables, the tax office might determine that 5,500 of that 7,000 is a return of capital. Therefore, the individual only pays income tax on the remaining 1,500.
Factors Affecting Your PLA Rate
- Age: Generally, the older you are when you start the annuity, the higher the annual rate, as your remaining life expectancy is shorter.
- Premium Amount: The larger the initial lump sum, the higher the absolute income payments.
- Interest Rates: Providers base their rates on government bond yields and prevailing economic conditions.
- Payment Options: Choosing "level" payments provides more initially, while "escalating" payments start lower but increase to protect against inflation.
How the Capital Element is Calculated
The Capital Element is fixed at the start of the contract. It is calculated by dividing the purchase price by a specific "life expectancy" figure provided by government actuarial tables. This tax-free amount remains constant for the life of the annuity, even if you live much longer than the projected expectancy.