How to Generate a Tax-Efficient, Guaranteed Income

Thursday 30 October, 2025

Understanding the Benefits of a Purchased Life Annuity

Creating a reliable income from your investments is one of the most common financial goals, especially if you’re looking for stability and tax efficiency. For those comfortable with investment risk, there are many ways to generate returns.

But what if you are more cautious, or have little investment experience? Beyond leaving money in cash and drawing the interest, what other possibilities exist?

One option worth considering is a Purchased Life Annuity (PLA). A PLA provides a guaranteed income, either for the rest of your life or for a set period. Importantly, only a proportion of the income is taxed as the remainder is treated as a return of capital, which can make them particularly tax efficient.

Unlike a traditional annuity (which is bought using pension funds), a PLA is purchased from cash savings. The benefits and considerations, however, are similar.

Purchased Life Annuity Benefits

Guaranteed income: You can choose for payments to remain level or increase with inflation, either for life or for an agreed fixed term.
Death benefit options: You may add features to protect your estate, such as:
- Guaranteed payment periods.
- Premium protection, returning unused capital to beneficiaries.
- Joint life cover, allowing income to continue until both annuitants have died.

(Please note: choosing additional benefits will reduce the income you receive.)

Purchased Life Annuity Considerations

Once set up, a PLA cannot be altered or cashed in.
Tax treatment depends on individual circumstances and may change in the future.
Without guarantees/value protection then death could mean receiving less than was paid in beyond the short term.

Why Now?

Since 2023, annuity rates have become far more attractive compared with the previous 15 years of ultra-low interest rates. For clients needing secure income, a PLA can form part of a balanced strategy.

For example, some may use part of their savings to secure a guaranteed income stream, while investing the remainder with the aim of generating long-term growth to help offset inflation (though investment returns are not guaranteed).

Howard Goodship, Independent Financial Adviser in Ringwood, said:

“If you would like to explore whether a Purchased Life Annuity could suit your circumstances, our team of Lonsdale Financial Advisers are available for a free, no-obligation chat. Together, we can look at the most tax-efficient and sustainable options for your needs. You can get in touch on 01727 845500 or drop us an email at enquiries@lonsdaleservices.co.uk.”

The value of investments and the income from them may fall as well as rise. You may get back less than you originally invested. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. The contents of this article are for information purposes only and do not constitute individual advice. The Financial Conduct Authority does not regulate tax advice.

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